Keep your repayments down with a cheap, low interest car loan.
You don't have to spend big to get a bit of help to buy your car, so when it comes to choosing a loan, get the lowest interest rate possible for you. Low interest rate car loans are available from banks, credit unions, brokers and dealers in the form of dealership finance. It pays to compare when it comes to car loans, so have a read of our guide and find out how to get a low interest rate loan for your new or used car.
Fixed Rate Car Loan Offer
Apply for IMB Car Loan for purchasing a new car and enjoy a great fixed interest rate.
- Interest Rate From: 6.49% p.a.
- Comparison Rate: 6.77% p.a.
- Interest Rate Type: Fixed
- Application Fee: $199
- Minimum Loan Term: 1 year
- Maximum Loan Term: 7 year
- Minimum Loan Amount: $2,000
- Maximum Loan Amount: $75,000
Comparison of low interest rate car loans
Did you know this about the advertised low interest rate?
Just because you see a low interest rate advertised for a car loan with one particular lender, don't automatically think that's how much you'll end up paying.
Those ultra-cheap interest rates may only be available to you if you have good credit or if you are buying a certain type of car. In some cases, those rates may only apply to loans amounts over $30,000.
This means if you're buying a car that is two years old and you only want to borrow $21,000, you may be paying a slightly higher interest rate than the one you saw advertised. It's important to find out whether your car loan has a balloon payment also.
1. Be in stable employment
Changing employers regularly shows a level of instability to your bank. By comparison, if you've held down the same job for several years, or only changed employment irregularly the bank is more likely to view you as a financially stable customer.
2. Have a good credit history
When you apply for finance through a lender, your enquiry is listed on your credit report. As long as you keep up with your repayments your credit report won't show any adverse listings. You're far more likely to get a good deal on low interest rates with a good credit history
3. Hold a deposit
There are lots of lenders out there willing to lend you the entire purchase price of your car, plus fees. However, if you can provide a deposit from your savings or in the form of a trade-in, you create equity in your asset. This means you're borrowing a smaller amount of money as compared to the value of the car.
4. Shop around
Never accept the first car loan offer you see. Always take the time to shop around and compare what else is available. Be prepared to ask questions about loan term and whether the rate is fixed or variable. You'll be surprised at some of the great deals available on low rate car loans when you look.
Regardless of which lender you approach for your car loan, always negotiate for a discount on your interest rate and ask if the fees can be waived. If you've already done some comparison shopping and you know what other lenders are offering, you can use this information as ammunition to strengthen your negotiations. If a lender is truly keen to win your business, they'll negotiate with you.
What should you look for in a car loan?
There are a variety of factors to take into account when finding the right low interest car loan for you:
- The age of the vehicle you want to buy. How old is the car you want to buy? This will determine the type of loan you're eligible for. Some lenders will only lend to you if you are buying a new car, which is generally considered to be a car under two years old. Used cars can be up to seven or ten years old. Cars beyond that age may need to be bought with an unsecured loan or a secured personal loan.
- Interest rate and loan terms. From there, you can compare the interest rates available to be sure you don't end up paying more than you should. Be sure to consider the upfront and ongoing fees of the loan as this will add onto the cost of your loan. Always take the time to input your numbers into a good car loan calculator. Check out your monthly repayments over a three-year term, a five-year term and a seven-year term.
- The cost options. You'll notice that your payments each month are much cheaper if you choose a longer loan term. However, you should also notice that you end up paying a lot more interest over that term than you would if you paid your loan out quicker. Work on a term that best suits your budget and the amount you can comfortably afford to repay each month. Some lenders may also offer you the option of a residual payment at the end of the loan term. This is also sometimes called a balloon payment. These types of loans can reduce your ongoing repayments, but keep in mind that the balloon repayments can be in upwards of $5,000.
Simone wanted to borrow $25,000 to buy a new car, but didn't want her repayments to go over $400 per month. She set her loan term to five years to keep her payments at $400 per month, but she would still have a $10,000 residual payment due at the end of the five-year term.
She can choose to pay this by refinancing her car loan's outstanding balance with her current lender, or a new lender, and pay off the remainder over the next few years.
She also has the option to trade in her car and buy something else. If her car is worth around $15,000 when she goes to trade it in and buys something else for $25,000, she'll end up with a new car loan of $20,000 to repay.
The fees and charges to keep in mind
Low interest car loans come with a few costs, but each individual loan will differ depending on the lender you apply with. Here is a breakdown of some fees to watch out for:
- The establishment fee.
This is the cost to set up your loan. Lenders usually add this cost into your loan amount and you pay it off with the rest of your principal.
- Other monthly fees.
These are ongoing fees for maintenance of your account.
- Any early exit or early repayment fees.
If you repay your loan early you may be charged this penalty by the lender to cover the loss of interest.
- Any Additional repayment fees
If you make additional repayments you may be charged a fee by your lender.
- The late payment fees.
You will be charged a fee for late and missed payments. Ensure you make your payments on time to avoid this.
What type of vehicles are low interest rates ideal for?
Lenders don't view all vehicles the same way. Always keep in mind that your lender will be using the car you buy as security for your loan, so the vehicle needs to be in a good enough condition to be sold by the lender if it needs to recoup losses.
For this reason, lenders are very keen to help customers buying new cars. The value of the car after a few years is still likely to fetch a decent amount if they ever have to try and sell it. A newer car is also far less likely to have mechanical problems.
However, if you're buying a car that is already five years old and you're taking out a five-year car loan, your bank may not view this so favourably. Your car will be 10 by the time you pay off your loan, so its value will have dwindled dramatically. This makes the car less desirable as a security asset.
This is also the reason why so many lenders are reluctant to use vintage cars or heavily modified cars as security for their car loans. They try to encourage borrowers to accept unsecured loans at much higher interest rates for these types of specialty vehicles.
So if you're searching for the lowest interest rate car loan around, always consider the type of car you want to buy and compare the options available.
Case Study: five vs seven years
Let's assume you want to borrow $20,000. Over a five-year term you might be quoted an 8% p.a. interest rate, but you're offered a 7.5% p.a. rate if you accept a seven-year loan term.
|Details||Option 1||Option 2|
|Loan Term||Five years||Seven years|
|Total Interest Paid||$4,331.80||$5,768.68|
In this example, you're paying 8% p.a. on the five-year loan term, so your repayments are $405.53 per month. You end up paying $4,331.80 in interest charges over five years.
By comparison, if you take the cheaper interest rate at 7.5% over a longer seven-year loan term your repayments are almost $100 per month cheaper at $306.77. This can be a very appealing option as it's obviously more budget-friendly. Unfortunately, even with the cheaper interest rate you end up paying more than $1,436 in additional interest charges.
One option you have is making additional repayments and paying off your car loan sooner while letting you take advantage of the cheaper interest rate, but it's important you check if you'll be charged an early repayment fee that wipes out any savings you thought you were getting.
What other factors influence interest rates?
Buying a brand new car might get you a lower interest rate, but if you don't want a brand new one or if your budget is more suited to a car that's already a couple of years old, you need to look for other things that can influence the interest rate you pay.
Is the loan secured or unsecured?
A secured car loan is going to come at a cheaper interest rate than an unsecured loan. This is simply because the bank is able to use your car as collateral security with a secured loan.
When you choose an unsecured loan, the bank actually holds nothing of yours as security. If you happen to default on your loan payments, all the bank can do is try to get you to catch up with your payments, or retain a debt collector to get their money back from you. They can't come after your assets.
Is the loan fixed or variable rate?
Some banks offer both fixed rate car loans and variable rate car loans. You should find that the variable rate offered is usually cheaper than the fixed rate.
However, while the variable rate might be cheaper now, it can and will fluctuate with the market. This means your repayments can increase if the rates go up. Your payments may also come down if the rates start to fall.
By comparison, a fixed rate loan might be initially a bit higher than the variable rate, but you have the certainty that your repayments won't change throughout the loan term. If the rates are likely to increase over the next few years, you could find that your fixed rate ends up being lower than the resulting variable rate.
What is the loan term?
There are some lenders out there offering lower rates for longer loan terms. For example, if you agree to extend your loan term up to seven years instead of taking out a 5 year loan, you could find that your interest rate drops a little.
Don't automatically assume that a lower rate will mean a cheaper car loan. It's important to work out your total cost over the entire loan to be sure you're getting the best deal.
Is the loan full doc or low doc?
If your loan application shows that you have a stable employment history and you can show payslips to verify your income, you're likely to qualify for a low interest rate car loan.
However, if you're self-employed and you can't verify your income with payslips or tax returns, it's likely you'll pay a slightly higher rate. This is because many self-employed people opt for low doc car loans instead. These types of loans let you verify your income with a signed declaration, rather than producing two years' worth of financial documentation.
As the lender is taking a risk and trusting your declared income amount, they set the interest rate based on the higher risk accordingly. There are plenty of low doc car loan lenders out there, so you can still negotiate and shop around between them to ensure you're getting the best deal for your situation.
What is your credit history like?
If you've seen a really low interest rate car loan advertised, but you have a bad credit history, it's likely you won't qualify for those really good rates. If your credit report shows defaults on other debts or court judgements, you probably won't qualify for a regular personal loan. In fact, most of the traditional banks may not accept an application from a borrower with bad credit.
Instead, you may be limited to specialist lenders. There are still lenders out there willing to extend loans to customers with poor credit history, but the interest rates they charge will be much higher than the ones you see advertised at your bank.
It's still possible to shop around and compare the rates available between non-conforming lenders. While you won't get a cheap rate, you'll still get the best rate available for your financial situation.
Are there any additional extras that come with the loan?
Some lenders will include extras on top of your loan repayment. These might include loan insurance premium payments, where you're paying for a policy that covers you in the event you can't keep up with repayments. This can increase the amount you have to pay each month, but doesn't actually go towards your car loan balance at all. It's up to you whether you want to insure your loan or not.
What are the brokerage fees that are charged?
If you're getting your car loan through a broker or through the finance officer at the car dealership, you might also be expected to pay brokerage fees on top of other finance fees. With some brokers, this can be as much as 4% of the amount you're borrowing.
Always check what fees are being charged on your loan and wherever possible, ask for them to be reduced. If the broker or finance officer won't reduce them, shop around elsewhere for a better deal. When considering low interest car loans, remember to compare your options before you apply.