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Car loans are a great financing option for many Aussies, giving you access to funds to purchase your desired vehicle, so you can drive it while you pay it off. Unlike personal loans which can be used to finance a variety of purchases, a car loan will typically come with a contractual obligation that the funds must be used to purchase a vehicle.
When it comes to getting financing for your new wheels, it’s important to consider the pros and cons of taking out a car loan, and considering whether it’s suitable for you.
When comparing car loan offers available from lenders, it’s important to compare a range of different features, not just the advertised interest rate. Here’s just some of the features worth comparing:
This is the advertised interest rate that will be applied to the outstanding balance of the loan each billing period, and added to your monthly repayments. The interest rate is one of the most important car loan features to compare, as interest payments are typically the highest loan expense on top of your ongoing repayments towards the loan principal.
These can come in a variety of forms, including sign-up or application fees, late fees, extra repayment fees, break/exit fees, and ongoing or monthly repayment fees. These can add up over the life of the loan, so it’s important to take them into account when comparing loans.
The comparison rate is an important figure to review when comparing car loans. The comparison rate takes all of the loan fees and the interest rate and consolidates them into a single number. This number allows you to more compare products in a more like-for-like way.
The interest rate on your loan can either be fixed or variable. If it’s fixed then that means the interest rate will remain static either for a fixed period or across the life of the loan. However, if the interest rate is variable, then that means your interest rate could increase or decrease over the life of the loan, and your interest repayments could fluctuate accordingly.
Car loans can often take the form of a secured loan, which means that an asset is required as collateral for the loan. The asset used to secure the loan is typically the car being purchased with the loan funds. An unsecured loan is where no asset is required as collateral, which from a lender’s perspective is generally perceived as more risky and can attract a higher interest rate.
The loan term refers to the number of years in which you’re required to repay the loan. Different lenders can have varying minimum and maximum loan terms, ranging anywhere from one year to ten years. The loan term can have a significant impact on the size of your monthly repayments, so it’s important to choose a loan with a repayment schedule that isn’t going to stretch your budget thin.
Finding a car loan that suits you can be an overwhelming process, but it doesn’t have to be! With iSelect you can compare car loans on offer from a range of products and providers to select the one which suits you*. Then all you need to do is click the ‘Go To Site’ button where you’ll be directed to the lender’s website and you can begin the formal application process. The lender will typically ask questions related to your age, income, employment status, whether you’ve declared bankruptcy in the past, and how much you’d like to borrow. Once your application has been submitted, the lender will typically perform a credit check to understand your credit history. If your application is successful, the lender will notify you and settlement of the funds could take up to a week or more.
Unfortunately, there is no ‘best’ or ‘cheapest’ option when it comes to car finance. Finding a loan that’s suitable for you depends on a range of factors, including comparing the individual features of certain products (interest rate, comparison rate, and fees), and taking into account your own personal financial situation (income, employment, existing debts, and expenses). By comparing a range of car loan products, you’re able to access more information which may help identify a loan that could work for you*.
Interest rates on car loans work similarly to personal loans and home loans, as opposed to say a credit card. With this loan you’ll need to make the minimum repayments towards the loan principal, plus interest on the total outstanding balance of the loan each billing period (typically either fortnightly or monthly).
Additionally, there are two different types of car loan interest rates: fixed and variable. Here’s how they work:
A ‘balloon’ payment is a one-off lump sum that is paid at the end of a car loan, covering off the outstanding balance. Because this larger lump-sum is due at the end of the loan term, it could have the benefit of reducing your previous monthly repayments over the loan term. That said, that lump-sum payment could still come as a bit of a financial shock, so it’s important to consider whether this kind of loan arrangement is suitable for your circumstances or not.
In short, yes. A car loan can either be used to finance the purchase of a new or used/secondhand car. That said, some loans can come with conditions of use. For example, if you tell the lender that you plan to use the funds to purchase a new car, then typically you may be contractually obligated to purchase a new car, not a secondhand car if you change your mind. So it’s beneficial to be clear about what kind of vehicle you’re after before you apply for a car loan. In addition to this, lenders can have criteria of what kinds of vehicles they finance, particularly when it comes to secondhand cars. It’s beneficial to provide the lender with as much detail as possible before making any commitments to car dealers or sellers.
When comparing car loans, it can be tempting to just look at the interest rate. Credit products can come with a range of different fees, and car financing is no exception. Below are just some of the fees which may be applicable to your car loan:
As part of the application process for your car loan, the lender will perform a credit check to understand your credit history. This involves requesting a credit report from one of several licensed credit reporting agencies. Your credit report can contain information on any of your past and present credit products (loans, credit cards), as well as if you’ve ever missed repayments, defaulted on a loan, been bankrupt, or defaulted on utilities or phone bills (if they were $150 or more, and 60 days or more overdue).
If the credit report shows a history of missed or late payments on credit products, or if you’ve defaulted on a loan in the past, this could negatively impact your ability to obtain a car loan.
Defaulting on your car loan can come with a range of negative consequences, which is why it’s important to choose a loan that’s suitable for your circumstances and budget. If your car loan is secured, then defaulting could see the lender repossesses the secured asset (which in this case could likely be the car). If the loan is unsecured, then defaulting could see the lender take some form of legal action. Additionally, despite whether the loan is secured or unsecured, defaulting on your loan will be noted on your credit score, and could reduce your ability to secure credit products in the future (such as a personal loan, mortgage, or credit card).
You might want to reach out to your lender if you’re struggling to meet your repayments. They may be able to offer some flexibility that makes your payment schedule easier to manage.
When it comes to finding a good deal on your car financing, there’s a range of options available. You could apply via a loan broker, directly with a bank or lender, or through the dealership in which you’re purchasing the car. One of the drawbacks of securing financing through a dealer is that they may not compare a range of loan options for you, as they may have just a single preferred loan provider. However, when you compare a range of products from different lenders using a comparison service like iSelect, you could increase your chances of finding a good deal*.
Yes, you can apply for a car loan before speaking to a car dealer, and it could even be a good idea to do so. Applying for a car loan and even getting pre-approval could give you a clearer indication of how much you’re able to borrow, which allows you to walk onto the dealership knowing what your spending limits are.
The main difference is that a secured loan requires an asset to be used as collateral for the loan, which in this case is typically the car being purchased. This means that if you default on a secured loan, the lender could repossess the secured asset. There can also be other differences between secured and unsecured loans, such as that unsecured loans could attract a higher interest rate, but this varies across products and providers.