What is an interest rate?

To put it simply, an interest rate is the amount of interest that you will pay on your car loan each year. The interest rate on your car loan varies between lenders and depends on things like your credit score, income and whether the loan is secured or unsecured.

How can I find the lowest interest rate?

The interest rate on your car loan might end up being different to the advertised rate. Sound confusing? The reason for this is because your lender will assess your personal circumstances, including your credit history, other debts and savings. If you have a low credit score or your income is unstable, you might only qualify for loans with high interest rates.

It’s a good idea to check the comparison rates on a wide range of loans to make sure you find the best deal. Comparison rates do the hard maths for you by rolling together the interest rate, upfront fee and service fee into one percentage figure. This means the comparison rate will be higher than the interest rate charged on the loan. In Australia, lenders are required to show a comparison rate when they advertise an interest rate. 

Financial comparison sites like Canstar, Ratecity, InfoChoice and Mozo can help you find and compare personal loans quickly and easily by providing the comparison rates.

Keep in mind, comparison sites could be influenced by advertising. It’s always worth checking a variety of sources to see a broad range of options and compare the ratings and rankings. And remember, comparison rates don’t include early repayment fees, late repayment fees or deferred establishment fees.

Once you’ve made a short list of the best loan deals, be sure to read the Product Disclaimer Statement (PDS) which explains all the fees and loan features in detail. Finally, contact the loan provider. Don’t be afraid to ask them as many questions as you need to, until you feel satisfied that you’re ready to commit.

Are interest rates fixed or variable?

Have a think about whether you prefer a variable interest rate, rather than a fixed rate. A variable rate could fluctuate throughout the life of the loan, which means your repayments may increase or decrease from time to time.

On the other hand, a fixed interest rate provides a sense of certainty. You’ll know exactly how much will come out of your bank account each month and you’re protected from the possibility of future interest rate rises.

A loan with a variable interest rate usually has no early exit fee. This means you won’t be penalised if you pay back the loan early. Consider the full picture when deciding which option works best for you.

Can I qualify for a low interest rate?

The interest rate that you receive will be influenced by many factors, including your income, expenses and credit score. 

You can find out your credit score for free through government financial guidance site Moneysmart, or financial comparison sites like Canstar. Your credit score takes into account information like the number of credit applications you’ve made and the amount of money you’ve borrowed. It also notes your history of repaying debts on time.

A typical credit score will fall between zero and either 1000 or 1200, depending on the credit reporting agency. The higher the score, the better! If your credit score is low, there may be steps you can take to polish it up.

Having a guarantor on your car loan might improve your chances of securing a lower interest rate. This means a friend or family member co-signs the loan and agrees to accept responsibility for the repayments if you default for any reason. A guarantor car loan may come with a lower interest rate because your guarantor acts as a type of security, making it less risky for your provider to loan you the funds.

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