How do I compare car loans?

Just as everyone’s taste in vehicles is different, there is no one-size-fits-all when it comes to car loans. While not quite as much fun as a test drive, you do need to do your homework to find the one best suited to your needs.  

How can you decide which is right for you? You will first need to make a few key decisions.  Planning and considering your situation upfront will help when comparing what car loan products are going to be the right match, and offer you the best value.

1. Loan amount: How much do you really need?
To decide how much you need to borrow, do some research and budgeting to work out how much (approximately) you are going to need for your next car. It’s smart to only borrow what you really need, rather than all that may be offered to you by a lender. Remember, when you borrow money to pay for something, the actual ‘cost’ of that item becomes much higher when you factor in the cost of the loan.

For example, if you borrow $20,000 to buy a vehicle with a 5-year Unsecured Loan and a fixed interest rate of 12.50%, once you factor in interest and fees that car may actually cost you around $27,417.

2. Repayments: How much can you afford to repay?
Look at your everyday budget, or create one, to see how much you can realistically afford to put towards car loan repayments. It’s always good to give yourself a buffer; failure to make a repayment at any time can cost you a lot in fees. Of course, it isn’t good for your credit rating either.  Are you expecting any major expenses or changes in income in the next few years, changing where or how much you work or perhaps hoping to have a baby? Be sure to build this in.

Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have leftover at the end of each pay period and how this will align with your repayments. This is to ensure there are no missed payment surprises. It may be worth opening a separate bank account for your repayments and transferring these funds in on payday so you are never caught out.

3. Loan term: How long will you need to repay?
Divide the total amount of your ideal car loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Jo wanted to borrow $24,000 to pay for a larger work vehicle. Based on his salary and existing expenses, he thought $120 per week / $480 per month would be an affordable repayment. This would be $5,760 per year, meaning in 5 years he’d have paid $28,800 — roughly the full amount, accounting for interest and charges.

A longer-term loan might seem attractive as it means lower monthly repayments, however, the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest, and potential fees. That being said, provided you look for a loan with flexible repayments, you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.

4. Loan type: Decide between a secured or unsecured loan
Do you have an asset that you are willing, or able, to put up as security against the loan? Perhaps property, or the new car you’re planning to purchase itself? If you are confident in your ability to repay the loan, then a secured loan will get you a better rate and may unlock access to greater funds. The newer the car, the lower your rate will be.

Be aware however that your asset will be at risk if you can’t make the repayments, and not all cars are suitable as a secured loan asset.

5. Compare: Start to request and examine your personalised offers
Now you know roughly how much you need to borrow, what you can afford as a repayment and how long you’ll need to repay your car loan. Next, you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments. 

Experiment with different combinations, such as different loan terms or repayment amounts, and match them against your needs. Need more help deciding? There are many third-party agencies (that don’t sell loans) that rate and compare a broad range of loans.

Canstar is one of the most established financial comparison sites, and they’ve been comparing products without bias since 1992. They release annual star-ratings for a range of personal loans from many providers.

To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia.  To come up with an overall score, they award points for:

• Price — comparative pricing factoring in interest and fees.
• Features — like the complexity of the application, the time involved before settlement, product management, customer service and loan closure.

These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide, but still dig deeper if you want to.

Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element — that is they may receive money for the people that visit their website en route to a particular lender. So if the best rate isn’t offered it may not show up on their comparison.

They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans do not truly reflect the best value car loans on the market. 

Another way to get information on your lender and loan is to read feedback from real,verified customers’ on ProductReview.com.au.

What questions should I ask to choose a car loan?

Here’s a useful checklist to be confident you understand your loan.

• What is the interest rate and the comparison rate?
• How do these rates compare to other car loans?
• What are the fees and charges? (e.g. upfront, ongoing, early exit)
• What are the terms and conditions? Do the car loan term and loan amount fit your needs?
• Can you afford the repayments?
• Are you comfortable with the lender? Have you checked its reputation and accreditation?

Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved are a major factor, but once you have shortlisted a few loans with similar costs, make time for these final checks: 

• Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this. It may matter to you, it may not. 
• Compare a car loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term. This can be a great way to reduce the overall cost of your car loan - but not if you’ll incur extra penalties. 
• Can you use the funds for the car you plan to buy? You can’t always use the borrowed money for whatever you like. For example, if you are taking out a secured car loan, you’ll only be able to spend the loan funds on a vehicle that meets the lender’s criteria. These criteria can mean the vehicle needs to be brand new, and perhaps newer than the car you may be planning to buy. Some lenders don’t allow you to take out a car loan for business purposes. Do make sure your purchase plans match the lender's policies. 
• What are the options for managing the car loan over time? Check and compare how easy the loan will be to manage with regard to repayments, your personal details, any refinancing down the track. The option to manage your account online is often available, but not always, and some lenders have more functionality than others. Using direct debit for repayments is common, yet without it, monthly repayments will be much less convenient and you are more likely to be penalised for late payments if you aren’t perfectly disciplined.

With this homework under your belt, you’re well on the way to being able to compare a range of loans out there, so you can feel confident you’re choosing the right one for you.