So, you’re looking to get yourself a new set of wheels. Maybe your beloved 1998 Toyota is on its last legs, or your family has grown, or maybe it’s just time for an upgrade. No matter the reason, a car loan can help you get behind the wheel sooner. But is the cheapest loan always the best? And what should you be looking for when shopping around for a car loan?
First, let’s talk about interest rates. When applying for a car loan you’ll usually have a choice between two types of rates, fixed and variable. A fixed rate means you’ll be paying the same interest repayment amount every time. This means you’ll be able to budget accordingly and be protected from interest rate changes.
Alternatively, variable rates can change and fluctuate with market and economic conditions. This type of loan can be a good option if you’re ready to take on a bit more risk (and have spare cash at hand in case your rate rises). The benefit of variable rates is that your repayments have a chance of lowering with market fluctuations. But, be warned, this also means your monthly interest repayments could rise.
Secured vs. Unsecured
A secured loan means your loan is ‘secured’ through the value of the car you're buying. Meaning, if you ever found yourself in a situation where you could no longer make repayments, your loan provider could sell the car and use those sale proceeds to repay the balance of the loan. Because this comes with less risk for the lender – and it’s easier for them to repossess your car if you cannot make your repayments over a period of time and therefore default on your loan – they’re often able to provide lower rates.
Most lenders will set a maximum vehicle age for secured loans and will generally offer a lower rate for newer cars. Unfortunately, this means if you’re looking at purchasing an older or vintage vehicle, a secured loan might not be the way to go.
An unsecured loan means the lender is incurring more ‘risk’ when lending to you. If things go pear-shaped, they would need to take legal action against you to recoup their money. This is a reason why interest rates tend to be higher for this type of loan.
On the upside, with an unsecured loan, there are generally less restrictions on where or what you can spend the loan money on. You may, for example, use your loan to purchase insurance, registration, new tires and more.
So when exactly will you be making repayments on your loan? Check with providers what their default repayment schedule is i.e. weekly, fortnightly and monthly, or if you can select the frequency yourself. Choosing a frequency that works for you can make all the difference - it can make it easier to make your payments on time and manage your budget.
When comparing car loans, it's important to ask about other fees attached to your loan. The lowest rate isn’t always the best loan, as it could mean the lender is compensating by charging you higher fees, which can increase the total cost of your loan.
So what are some fees could you expect to pay on a car loan?
- Establishment fees: These fees can range anywhere from $0-$500 depending on the lender. This covers the cost incurred for setting up your loan.
- Monthly fees: Loan providers usually charge a fee for managing your loan. Usually, this is around $10-$25. You should keep this in mind when deciding on a loan. Higher monthly fees mean you could be paying an additional $1k-$2k over the life of your loan and depending on your selected loan term.
- Early repayment fee: Did you know that some lenders can actually charge you an additional fee for paying your loan off early? Look out for lenders which have no early repayment or exit fees if you think you might be able to pay off the loan quicker.
- Late payment fees: Many lenders will charge a late or missed repayment fee which will be laid out in your loan contract.
Now, it’s time to think about which type of loan fits your budget and needs:
- Fixed or variable rates?
- Secured or unsecured loan?
- Do you have the budget for the fees your lender charges?
- Which repayment schedule suits you? Do you need it to be flexible?
Once you’ve answered these questions, use a loan comparison site or get a free rate estimate from potential lenders to compare your personalised interest rates. Just make sure the lenders’ rate estimates won’t leave a mark on your credit file.