What to consider when choosing a car loan


Buying a car is a big deal, and probably the second most expensive purchase you will make, behind your home, so it is important to get it right.

This select the best guide to Car Loans is designed to equip you with the knowledge required to navigate through the process of selecting and applying for the car loan which best fits your requirements and financial circumstances. From considering the differences between the types of car loan available, to how to give you the best chance of acceptance, the guide covers all the steps.

1. What loan amount can I afford?

Their will always be a car which is just that little more expensive than the one you are considering, be it the sports version or the convertible we all desire the best car we can afford. The key point here is working out what amount you can really afford to spend on your new car, setting a budget and then sticking to it regardless of how much you’d like the one that is just a little more expensive.

The personal loan amount you will require will depend on the price of the car that you wish to purchase and how much of a deposit you have to contribute to the purchase of the car. Most importantly, it will depend on what you can afford to make in repayments.

To establish what you can afford to make in repayments use our car loan repayment calculator. Many car loan providers will provide an in principle approval for your car loan which means you know exactly how much your budget is when you are hunting for your new ride.

 

2. Which car loan type is best?

The lenders offer four car loan types; to establish the best car loan for your car purchase it’s a good idea to first understand these car loan types:

Variable Interest Rate Car Loan

With a variable interest car loan the lender is able to change the interest rate that will directly impact your repayment amount, so if the interest rate is increased your repayment amount will also rise, and if the interest rate is decreased your repayments will decrease. Given these potential fluctuations in repayments these variable car loans require careful budgeting to ensure no repayments are missed, and all are paid on time and in full.

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Fixed Interest Car Loan

With a Fixed interest car loan you can be sure the interest rate and repayment amount will not change across the term of the loan, so the interest rate you sign up to when you are accepted for the car loan is the one you will pay throughout the term of the loan. This fixing of the interest rate makes budgeting easy as you know exactly how much you are required to pay for every single repayment.

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Secured Car Loan

With a secured car loan the lender provides the borrower with the funds for the purchase of a car or other vehicle, and then secures the loan against that vehicle. The presence of this security means that if you fail to make your repayments on the loan the lender has the right to repossess your car and sell it to cover the outstanding balance on the loan. On the upside, this security also means the lender views this loan as being light on risk and passes the benefit of this on in the form of lower interest rates.

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Unsecured Car Loan

Unsecured car loans do not require the car to be offered as security against the loan. With no security, lenders are looking for excellent credit reports from applicants as an indication that you have the means and history of managing loan repayments in an orderly, and timely fashion. The interest rates on unsecured loan tend to be in the higher ranges than those offered for secured loans.

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3. The decision to purchase a new or used car will impact your car loan choice

The age of the car you plan on purchasing is an important criterion in the eyes of the lenders as it is a reliable metric for valuing vehicles, particularly when considered in association with the number of kilometers a vehicle has on the clock.

Car loans designed for new cars

A new car loan is a type of personal loan, which is designed specifically for borrowers seeking to purchase a new car. These new car loans generally include tight eligibility conditions around the age of car which can be purchases using this loan, these conditions vary by new car loan providers with some only lending on new car purchases whilst others will consider purchases for cars under 2 years old subject to the vehicle having low kilometers on the odometer.

The key benefit of new car loans is that they generally offer lower interest rates than those offered for used car purchases, as the lenders consider a new car loan to be lower risk, given the higher values of the assets involved.

Car loans designed for used cars

Having decided a used car is the best option your next step should be to establish what age of used car used car loans are available for, as many lenders have tight restrictions on the age of cars that they will provide funding for, as a general rule the newer the car the more choice you will have for sources of a used car loan.

Used car loans tend to attract slightly higher interest rates than new car loans, with both unsecured and secured loan options available from a broad range of lenders, with terms from 12 months to 5 years.

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4. Car Loan terms and conditions

The car loan terms and conditions are an important consideration in your car loan comparison as they can impact significantly the cost of your car loan; two of these conditions are early exit penalties and the ability to make extra payments:

Early exit penalty

The ability to pay off your car loan, in full prior to the end of the loan term, without incurring any penalty payment is a condition that should be on your wish list. Although early repayment of you car loan may seem an improbable now, things change and it’s better to consider these positive eventualities when selecting your car loan.

Making extra repayments

Making extra payments on your car loan is a great way of reducing the amount of interest you will be charged and also brings forward the end of your loan agreement. Many lenders have conditions around extra payments such as limits on the number which can be made, so be sure to consider these conditions in your car loan comparison.

 

5. Should I consider the finance offered by the dealer?

When purchasing a car from a dealer it is very likely they will offer to provide a finance package to help you purchase the car.

New car dealers use finance deals as a draw card for their cars, with many TV adverts for new cars focusing on very low finance deals that can be as low as 1-2%% p.a. The rates offered by the dealers are often the lowest available, which begs the question how can a car dealership be offering loans cheaper than the banks?

The simple answer is that the car loans the dealers are offering are tied to the full list price of the car and fully loaded delivery charges. So if you opt for a car loan from your dealer you will most probably have no room to negotiate on the car price, which on a new car is an opportunity lost.

Car dealers also use finance offers to divert customers attention away from the price of the car, instead focusing on the monthly repayments, which may well be affordable to the customer, but they don’t give a transparent view of what you will be paying for the car in total.

Tips on how to assess dealer finance offers:

  • Ask how much the total repayments are over the life of the loan, regardless of the interest rate.
  • Compare the dealers low interest rate offer with what's available outside the dealership.
  • Ask if the low finance rate is linked to the price of the car, or is the price of the car negotiable as well.

 

6. Being prepared when you make your car loan application

To make a car loan application you will need to provide some details about yourself and some documentation to validate your identity and financial position:

Validating your ID

This is standard process when you apply for any type of credit from a lender be it a credit card, personal loan or in this case a car loan. Documents that will be required include:

  • Australian Drivers License
  • Australian Passport
  • Birth Certificate
  • Medicare Card

Address and contact details

You will need to confirm your residential address and contact phone numbers. Your residential address is likely to be used to conduct a credit assessment where the lender contacts a Credit Bureau to attain details of your credit history.

Credit Report Check

All lenders will conduct a credit report check that is used by the lenders to assess the probability that you may default on the car loan. Your credit report contains details of your credit history in terms of any previous and current loans in terms of how you are managing these, specifically in terms of making payments on time.

Proof of income

All car loan applications include a request for details of your income and expenses, lenders may request documents to validate the income levels stated in your application, this will normally be wage or salary slips for the last 3 months.

Details of the car you wish to purchase

If you are using the car as collateral in a secured car loan you will need to provide details of the car including registration and engine number. If you are purchasing your car from a dealer you may need to provide their details so the lender can organize payment direct to the dealer.