Before you sign on the dotted line with the car loan your bank is offering, take a moment to work out whether you might be able to get a better deal.
There are some incredibly cheap car loans out there, offered by lenders you might otherwise never have heard of that could save you money. The key to finding cheap car loans is to be sure you choose the right loan type to suit your financial needs. It's also important to check what other terms and conditions might be attached to your car loan, as hidden fees and charges could end up costing you far more than you expect.
Comparison table of car loan interest rates
Here are some things to consider when you're looking for the cheapest car loan.
What type of car are you looking for?
The type of car you want to buy can play a part in the type of car loan you get. It's also important to take into account the age of the vehicle, as this can also determine the interest rate you end up paying on your loan.
Most banks and credit unions offer very competitive interest rates for customers wanting to buy a new car. The rates are usually lower for new car loans simply because they're considered to be a lower risk. A new car is more likely to retain most of its value for the majority of the loan term. As the car you purchase becomes the collateral security for the loan, it's in the lender's best interests if they have a good chance of being able to sell the asset for a good price if you can't repay your loan.
Not all new car loans are restricted to brand new cars. In some cases, the lender may consider any car that is under 2 years old to still be a new car, but this may be dependent on the number of kilometres displayed on the odometer.
Used car loan
A car loan to buy a used car is still a secured loan. So the lender still uses your vehicle as the collateral security for the loan, but there still may be restrictions on the age of the car.
With most lenders, a used car needs to be between 2 and 5 years old at the time of application. Some lenders place further restrictions on the age of the vehicle, by stating that the car cannot be more than 10 years old at the end of the loan term.
As it's likely the value of the car will reduce over the loan term from the original used car price, the lender may consider this a higher risk than buying a new car. As a result, the interest rates tend to be a little higher on these types of used car loans.
Unsecured car loan
There are times when the car you want to buy may be older than 5 years old. When this happens, the bank is unlikely to want your vehicle used as security for the loan, simply because its value may not be retained so it has no value to them. In this event, the lender may suggest you apply for an unsecured personal loan instead. The car you buy won't be used as security for the loan, which means the lender can't repossess the vehicle if you stop making your repayments. As a result, the interest rates on these types of loans are much higher, as they're considered to be a higher risk.
What Are the Different Loan Types?
Aside from factoring in the age of the car you want to buy to work out your interest rate, lenders will also have a variety of different types of car loans for you to choose from. These include;
Variable rate car loan
A variable rate car loan will mean the interest rate you pay on your loan amount may fluctuate according to the market. If the rates go up it's likely your repayments will also go up to cover the additional interest charges. If rates go down your repayments should also be reduced as the interest charges won't be so high. A variable car loan can be quite flexible, but it can also be harder to budget for repayments if they begin to vary from month to month.
Fixed rate car loan
A fixed rate car loan lets you lock in the interest rate for the entire duration of the loan. As the interest rate can't fluctuate throughout the loan term, your repayments will also stay exactly the same. This makes it much easier to budget for repayments each month. However, the fixed rates available from most lenders tend to be higher than the variable rates available.
Secured car loan
With a secured car loan, the vehicle you buy is used as collateral security over the loan. This simply means that the lender has the right to repossess the vehicle in the event that you stop making your car loan repayments. Their aim is to sell the car in an attempt to recoup some of their money. As the lender has this level of security, the interest rates offered will be lower than those offered for unsecured loans.
Unsecured car loans
With unsecured car loans, the lender doesn't use any of your assets as security for the loan. This means they have no asset to repossess if you stop making your loan repayments. As this poses a higher risk to the lender, they tend to charge higher interest rates on unsecured loans.
Self-employed people tend to purchase cars that are intended predominantly for business use. The loans used for this purpose are called chattel mortgages. These are essentially just the same as a regular secured personal loan, with the exception that it's solely for business use.
The car you buy is still used as security over the chattel mortgage and you are still required to make regular monthly instalment payments off the principal balance. However, you can nominate whether you want a final instalment payment made that is larger than the usual payments. This residual payment is also called a balloon payment.
Opting for a balloon payment at the end of the loan can result in reducing your monthly repayments throughout the loan term. This can be beneficial for business cash flow in some instances. Of course, it's a good idea to try and ensure that the amount that will be owing on the balloon payment at the end will be covered largely by the trade-in value of the vehicle.
Another financing option available that may be more suitable to some people is a car lease. A novated car lease can be an option for some employees who are able to make an arrangement with an employer to include this in a salary package. Essentially, the lender purchases the car and your employer makes the lease payments on the vehicle out of your before-tax salary. This can potentially help to reduce your taxable income, resulting in you paying less tax overall. At the end of the novated lease term you have the option to purchase the vehicle outright for an agreed sum, or you can choose to give that one back and upgrade to a different car after you enter into a new lease agreement.
For the self-employed, a car lease can also be used to buy a car for business purposes. The lender purchases the vehicle and you make regular lease payments until the end of the agreement. A commercial car lease may give you the option to purchase the car at the end of the lease term at a reduced price or you can choose to give the car back and enter into a new lease agreement for a different vehicle.
Car hire purchase
Self-employed people also have the option of financing a car using a car hire purchase option. Each repayment made on a hire purchase agreement is reducing the balance owing on the purchase price of the car.
It's important that self-employed borrowers discuss the different car loan and financing options with an accountant before making a decision. There are multiple cash flow and tax implications that may apply with different types of finance, so it's best to discuss which option will be best suited to your business needs.
Things You Need to Know and Watch Out For
Before you apply for any loan, it's always a good idea to check as much as you can about the offer you're getting. Here are some things you need to look for before you proceed.
The interest rate charged on your car loan will play a part in how much your repayments will be. Always know what rate you're being offered and take the time to compare other lenders to be sure the offer is competitive.
Car loans can be set over loan terms as short as 1 year or up to as long as 7 years. Choosing a shorter loan term can reduce the amount of interest you pay on your loan overall and get your debts paid off much faster, but will increase your monthly payment amount.
Likewise, opting for a longer loan term can reduce your monthly payments but will increase the amount of interest you pay in total and take you longer to pay off your debt. Choose a loan term that suits your financial goals and your income.
Ask what your minimum repayment amounts will be and check that this is affordable on your income and budget before you proceed.
Ask if you're able to make extra repayments off your loan at any time electronically or by phone banking. You might also want to check whether you're able to nominate to make extra payments as part of your regular repayment agreement. For example, you might decide to pay an extra $50 per fortnight on top of the minimum amount due and have this total amount direct debited from your account each fortnight.
Monthly account fees
There are lenders that charge a monthly account fee or administration fee on their car loans. This can range anywhere from $5 per month up to $15 per month, depending on the type of car loan you're applying for. You will need to pay this amount in addition to your minimum loan repayments, which can increase how much you pay over the term of the loan.
Many lenders will charge an establishment fee to cover their costs of creating your loan documentation. This might be as low as $100 but can be as high as $600 or more. If you proceed with a loan application with a finance person through the car dealership, you might even be charged brokerage fees on top of the establishment fees, raising your costs even more.
Early repayment fees
Some car loans will charge you a fee if you repay any or all of your loan before the agreed loan term date. This is most common with fixed rate car loans, although it can also be charged on other loan types as well. If you intend to make extra repayments on your debt to pay it off sooner, check how much you might be charged. Ideally, you want a loan that doesn't penalise you for paying off your debts.
As the lender will be using your car as collateral security for your loan, they may insist that the vehicle is properly insured at all times until the loan is fully repaid.
When the cheapest interest rate isn't the cheapest car loan
When most people go hunting for the cheapest car loan, they immediately look for a low interest rate and believe they're getting a great deal. Unfortunately, it is very possible for the car loan with the cheapest rate to end up costing you more over the term of the loan if you're not careful.
Case study John
John is buying a car for $35,000. He is applying for a car loan of just $25,000 after the trade-in of his old vehicle. He's shopped around and found a cheap car loan with an interest rate of 8.5% with Bank A. The rate offered by Bank B was at 9.0%, so John overlooked this one for being too high. Bank A's offer is the lowest rate he could find, so he proceeds with his loan application.
|Description||Bank A||Bank B|
|Loan Term||5 years||5 years|
|Monthly Account Fee||$10||Nil|
|Monthly Repayment||$522.91 (includes monthly fee)||$518.96|
|Early Repayment Fee||$550||Nil|
|Total Amount Paid||$32,524.80||$31,237.53|
Unfortunately, John didn't look into what other fees and charges might apply to his loan. John already knew he planned to make extra payments off his car loan each month, but he didn't take into account the early repayment fee he would be charged for doing this. He also didn't check how much he'd be paying on establishment fees or monthly account fees. Those additional fees alter the amount he pays over the term of the loan so that cheap rate loan ended up costing him an extra $1,287.27 overall. In this case study, the loan with the slightly higher rate but far better loan terms ends up being the cheaper option overall.
Ways for getting lower interest rates
Regardless of the interest rate you see advertised on your local bank branch's window, it's always possible to get a lower interest rate if you're willing to negotiate. Here are some tips for reducing the interest rate you pay with various lenders.
Shop around first
If you take the time to shop around on a car loan comparison site, you'll get a strong idea of what interest rates are available with a range of lenders. This gives you plenty of ammunition when it comes to negotiating with your own lender.
If you're keen to stay with your own bank or credit union for your car loan needs, take your comparison shopping information with you when you make your enquiries. This will encourage the lending officer to see if there is any room to take a few extra points off the interest rate they offer you.
Car dealership finance
When you apply for a loan through the finance officer at a car dealership, you have lots of room to negotiate on rates. This is because the dealership often receives their loans at discounted rates, leaving them some extra room to bump up the rate you pay. That margin between what they pay to the lender and you pay to them forms their 'trail' commission. In other words, every time you make a payment, some of it goes towards paying interest to the lender and some goes to paying commission to the car dealership.
Haggle and negotiate on the rates you're offered through the car dealership. They usually have around 2% that they can drop from the initial rate they may have quoted you.
Some banks will offer a discount off their advertised interest rates if you also have other banking products with them. If you already have a mortgage, a credit card and a transaction account with one bank, ask if they will give you a discount on your car loan if you add that to your package.
Ways for reducing monthly repayments
It's always possible to reduce the payments you make on your car loan each month. The key is to ensure that you're not paying more than you really should over the entire term of the loan. Here are some ways you can reduce your minimum monthly payments.
Lowering the interest rate
By reducing your interest rate even a little, you should end up paying less on your monthly payments. This is one of the primary reasons why you should always take the time to check comparison sites before you apply for any type of finance.
Lowering your loan amount
It might sound obvious, but it's true. If you can borrow even a little bit less on your loan amount you'll end up paying less on your monthly repayments. Borrowing $5,000 over a 5 year loan term adds up to $1,000 per year extra you have to pay back, plus the interest charged on that amount as well. This adds up to approximately $90 per month out of your pocket.
You can reduce the amount you need to borrow by offering a trade-in of your old vehicle or even paying a slightly larger deposit out of your savings. Each of these options will help to reduce your loan amount, which naturally keeps your monthly payments as low as possible.
Residual balloon payment
When you apply for a car loan that has a residual balloon payment remaining at the end of the term, you can drastically reduce your monthly repayments. For example, if you borrow $30,000 and you leave a $10,000 residual balloon payment to be paid at the end of the loan term, your repayments will be calculated based on the $20,000 to be repaid over 5 years, plus interest on the entire $30,000.
While this might end up much easier on your budget for monthly repayments, it's always important to check that the balloon amount owing at the end is likely to be repaid and covered by the trade-in value of the vehicle after that time. Otherwise, you're likely to be stuck with a debt that is due immediately.
Longer loan term
Another way to reduce your monthly repayments is to extend the loan term. When you choose a longer loan term, the amount you're required to pay each month is reduced. Unfortunately, the lender also gets to charge you interest on your debt for a longer period of time, so you could end up paying far more in interest over the term of the loan.
Case study 2
Let's take this example of loan term on a $25,000 car loan.
|Description||Option 1||Option 2|
|Loan Term||5 years||7 years|
|Total Paid Over Loan Term||$30,594.38||$32,993.22|
In this example, Option 1 has a higher monthly repayment, but you only end up paying $5,594.38 in interest over the term of that loan. By comparison, Option 2 allows you to pay $117.13 per month less on your monthly repayments. This will definitely make budgeting easier throughout the loan term, but you end up paying $7,993.22 in interest over the loan term. This is $2,398.84 more in interest charges you end up paying overall.
Things you will need for your application
Below is a checklist of some of the information and documentation you may need to supply for your car loan application.
You will need to supply some form of identification when you apply for a car loan to verify who you are. It might be enough to supply just your driver's license with some lenders, but others may also ask for additional information. This might mean supplying a birth certificate or a passport or Medicare card.
When you apply for a loan you will need to provide some verification of how much you earn. This might be done by showing a couple of your recent payslips or your tax return documents or group certificates.
Self-employed borrowers may need to provide tax assessment notices for the past two years, along with current profit and loss statements. Some lenders may also ask to see Business Activity Statements (BAS) for the past few quarters to further verify business revenue.
Your car loan application will include a section for you to input your employer's details. This will include your employer's contact information and the length of time you've been employed by that company. If you've only worked in your current job for a short time, the lender may want information about your employment history for the past three to five years to show that you've maintained a steady job over this time.
Some banks may want to see some type of evidence of your savings history in order to qualify for a loan. This can be done by providing the past few months' worth of bank statements showing your income and savings amounts.
In order to be approved for most loans, lenders may want you to have a good credit history. If you're unsure what your credit history might look like, you may want to order a copy of your credit report to see if any defaults have been listed there. Of course, if you don't have any credit history at all yet, you might be able to show your ability to make payments on time by providing recent bills you've paid in the past few months. These might include phone bills, electricity bills or any other regular payments you need to make.
Loan approval process in Australia
Getting your car loan approval might seem quick, but there are several stages your application needs to progress through before your money is released to the seller of the car.
- Step one. To get the approval process started, you will need to fill out and sign an application form. This can be done in person at the bank branch or at the car dealership, or alternatively can be filled out using the lender's online application form on the website.
- Step two. Once your application has been received, it's reviewed by a credit officer. If everything is in order, you should receive your conditional approval almost immediately.
- Step three. The Final Approval stage is where the lender may request you to supply any documentation to support your application. This includes your identification, payslips or income verification, bank statements and any other pertinent information required.
- Step four. Once your final approval has been received, you'll be asked to sign your loan documentation. This is your agreement with the bank to repay the amount of money you're borrowing over a specified loan term at an agreed interest rate. When this has been done, the lender will release the money from the proceeds of your loan to the car's seller and you get to drive away in your new car.
Frequently asked questions about car loans
Can anyone apply for a car loan?
Yes if you meet the eligibility requirements. As long as you are older than 18, you're a permanent resident of Australia and you can verify that you earn a steady income you should qualify.
How much can I borrow on a car loan?
The amount you're able to borrow is determined based on your income and current liabilities. There may also be minimum car loan amounts set by individual lenders. In most cases, the minimum amount you can apply for is usually about $5,000. The maximum is heavily dependent on your income and ability to meet your repayment obligations.
Can I get a pre-approval for a car loan?
Yes. A pre-approval is a great way to work out how much you can comfortably borrow and what your repayments will be before you head out car shopping.
How long does it take to get an approval?
The approval process for car loans is usually very quick. In most cases you should get a conditional approval in a couple of hours. You should receive your final approval on the next day after submitting your application.
Can I include the insurance and on-road costs in my loan amount?
Some lenders will allow you to include the costs of your car insurance premium and other costs associated with the purchase into your loan amount. Always ask to be sure this applies to your loan type.
Are there any types of cars I can't buy with my loan type?
Some lenders will place restrictions on the age of vehicles and even some restrictions on some makes and models of cars. If you're in doubt with the car you want to buy, take the time to ask your lender some questions about whether it will be suitable for them to use as security for your loan.
Do I need a deposit for a car loan?
Some lenders will allow you to borrow the entire purchase price of your car. This will depend heavily on the strength of your financial situation and your credit history.
How do I make payments off my loan?
Your repayments can be made automatically via direct debit on a weekly, fortnightly or monthly basis with most lenders. This is where an amount of money is debited from your regular transaction account each month to cover your payment. Some lenders will also allow you to make your payments via BPAY if you prefer.
Can I make extra repayments off my car loan?
This will depend entirely on the lender you choose and the type of car loan you want. Some loans will charge you an early repayment fee for making extra repayments. Others won't. It's always a good idea to check whether this fee will apply to your loan before you proceed with the application.
How do I make extra payments off my loan?
Most lenders will allow you to make additional repayments in a variety of ways. You can choose to make a payment directly into your loan account using BPAY. You can transfer funds electronically from your regular transaction account over to your loan account.
You can also nominate to have each payment taken out at an agreed amount as part of your direct debit agreement. For example, if your minimum repayment is $387.50 per month you might nominate to have your direct debit payments set to pay $400 per month instead.
How is the interest calculated on my loan?
Interest is calculated on your outstanding loan balance on a daily basis and charged to your account monthly in arrears.
Can I buy a car privately or do I have to buy through a dealer?
You are able to buy your car through a private seller if you wish. You will need to provide details about the car to the lender, such as registration number and vehicle identification number (VIN) for the loan to proceed.
Does applying for a car loan affect my credit report?
Any enquiries you make for any form of credit will be entered onto your credit report as an enquiry with that lender. If your application is declined and you end up submitting another application elsewhere, your report will show two enquiries.
I've got bad credit. Can I still apply for a car loan?
Many banks may decline a car loan application from a borrower with a bad credit history. However, there are some lenders out there willing to let you borrow money even with bad credit. You may want to discuss your application with a car finance specialist before you proceed. This will help you to locate the appropriate lenders to help with your situation and improve your chances of getting your loan approved.
Should I choose a balloon payment at the end of my car loan?
A balloon payment is a residual amount of money that needs to be repaid at the end of the loan term. This type of loan lets you reduce your monthly repayments throughout the term of the loan and then you need to pay off the lump sum amount still owing at the end. You might choose to sell the car to pay off the lump sum amount due or trade it in on another vehicle and refinance that residual amount into your new loan.
Will I still owe the bank money if they repossess my car?
In the event that you stop making your car loan repayments, the lender may choose to repossess your car. They will sell it in an attempt to get some of their money back along with covering any repossession fees they were charged. If the sale price of the car doesn't fully cover those costs or pay off your outstanding loan amount entirely, then you may still need to repay the bank for the remaining amounts owed.