Australians love their cars. In fact, we access billions of dollars in finance for our car purchases each year. And the vehicles we prefer tend to be pretty nice ones. The average size of a car loan is $31,738.40. So it’s no wonder we look to pay for our new wheels with car finance.
The type of car loan, its conditions and how quickly you pay it back impacts how much a loan costs you over its lifetime.
To work out the overall cost of your car loan finance, you need to factor in:
- Car loan interest rates: Fixed or Variable — The biggest factor in how much a personal loan will cost you is the rate of interest you’ll pay on the amount borrowed. If you are opting for a variable-rate loan, it is best to also calculate a worst-case scenario, one where a loan’s interest rates rise significantly in the future to be sure you have a comfortable buffer in the event things change. The interest rate will also be different for secured car loans compared to unsecured car loans.
- Upfront fees: The ‘establishment’ or application fee can vary greatly, it’s an area where shopping around can make a difference.
- Ongoing fees: Ongoing fees that occur throughout the loan: monthly/annual fees; default, dishonour or missed payments; other hidden fees
These three costs can be combined to create a comparison rate. As long as you are comparing the same car loan terms and amount, a comparison rate helps you to compare the cost of different loans.
There may be fees for early repayments if you pay back the loan in full early. Balance these against the benefit of reducing the amount of interest that you pay on your car loan by making extra repayments reducing the amount you owe. Always shop around and use comparison tables, a repayment calculator and the comparison rate as a guide.
Car loan interest rate
The interest rate, also known as Annual Percentage Rate (APR) or Advertised Rate, is the percentage that you’ll pay on top of the amount you borrow in interest, usually expressed as an annual rate. Interest rates vary depending on the lender, your credit history, your repayment schedule and a range of other factors. They are based upon the lender’s calculation of risk (for you as an individual and the market as a whole) and their underlying costs.
Many lenders market their car loan products using a ‘headline’ advertised rate, which represents the best or cheapest interest rate they are able to offer a customer. Often this low rate is available to only a small proportion of borrowers. Before you apply anywhere, it pays to do your research and get a personalised rate from a number of providers. You just need to make sure that the lender’s quote process is ‘credit score friendly’. That is, they only conduct a soft-check on your credit file, which won’t impact your credit score. Asking Plenti for a RateEstimate will not affect your credit score.
The lowest car loan interest rate does not necessarily mean the best car loan. You need to consider the total cost of the loan including interest, fees and other costs to truly assess the value of any interest rate on offer.
Car loan interest rates will vary according to the type of loan. Usually, a secured car loan will attract a lower interest rate than the rate for an unsecured loan, because you’re offering something as security against defaulting on the loan. And that something is usually the car you’re planning to purchase. And the newer the car, the lower your interest rate may be.
Car loan comparison rates
The comparison rate represents the overall cost of a car loan, including the interest rate and fees, expressed as an annual percentage. As a result, the comparison rate is usually higher than the interest rate charged on the loan.
Under the National Consumer Credit Protection Regulations, lenders must provide a comparison rate when they advertise an interest rate.
For car loans, there is a standardised measure for how comparison rates are calculated:
- For personal loans 3 years and under, comparison rates are calculated on a $10,000 loan amount over 36 months
- For personal loans 4 years and over, comparison rates are calculated on a $30,000 loan amount over 60 months
Whilst the comparison rate is a useful tool for comparing personal loans on a like for like basis, it’s important to remember that not all costs are included. For example, you still need to consider late payment fees, early repayment fees and deferred establishment fees.
Car loan repayments
Your car loan repayments are the amount you agree to pay to your lender on a regular schedule. Repayments can be weekly, fortnightly or monthly and vary by lender. Whereas interest rates and comparison rates can sometimes hide the true cost of a loan, your monthly and total repayments provide a clear basis for comparing the value of personal loans from different lenders. When making your comparisons, it is important that the loan repayment calculations have been quoted inclusive of any ongoing fees for all lenders.
Upfront fees, also known as establishment fees or credit assistance fees, are once-off charges that are applied at the commencement of a car loan. These fees can be:
- A flat fee (e.g. $150) that applies regardless of the value of the loan
- A tiered fee (e.g. $250, $500, $750) based on the total amount borrowed
- A percentage fee (e.g. 4%) based on the total amount borrowed and the credit or risk profile of the customer
- A hybrid fee (e.g. $200 + 2% of the loan amount)