Compare Car Loans - Australia

So, you want to buy a car. It shouldn’t be that hard, should it? But all that jargon can make getting car finance confusing. Your time would be far better spent choosing your awesome new ride instead of tearing your hair out over finance.

That’s why we put together this guide — to help you compare car loans, which could help you select one that suits your needs.

A car loan is a type of loan that provides credit specifically for buying a car or other vehicle. A car is generally not the only thing you could buy with a car loan. You could potentially buy a van, truck, motorbike or ute. And you could buy a new or used vehicle with a car loan.

Car loans may be granted to individuals and businesses. As with any other kind of loan, you have to repay the credit with interest, plus any fees.

Car loans are much like any other personal loan. They have a set loan period, interest rates and other fees and charges. Many allow extra repayments, which means you can pay extra amounts in between your compulsory repayments and therefore repay your loan sooner. Some also offer redraw facilities, which enable you to take back some of the money you’ve repaid if you have unexpected expenses. The main difference is that they’re specifically granted to buy a vehicle.

The most unique feature of a car loan is something called a balloon payment or residual payment.

Loans that offer balloon payments mostly work just like any other car loan. You pay off the loan gradually over time with regular repayments, but at the end, you pay a final amount as a lump sum.

Balloon payments reduce the earlier monthly payments, which can ease the repayment burden earlier on but can increase the total cost of the loan because interest is charged on the total balance. It’s also important you understand that loans that include a mandatory balloon payment will require you to make that balloon payment by a specific date. If you can’t make the lump sum payment by that date, you may risk having to take out another loan just to pay the balloon payment.

When you take out any kind of loan, your lender will assess your ability to repay the debt. The lender’s research into your financial history and situation can affect whether it will approve the loan, the amount you can borrow and the interest rate you’ll have to pay.

One way to increase the chance your loan will be approved and potentially reduce the interest rate is to promise your lender that it can sell something you own if you can’t afford to repay the loan. That asset is collateral and acts as security for the loan. Such a loan is therefore called a secured loan.

If you don’t provide any collateral, the loan is called an unsecured loan.

Because car loans are granted specifically to allow you to buy a car (or other vehicle), many are secured loans that enable the lender to sell your car if you can’t repay the loan.

The Reserve Bank of Australia (RBA) has a meeting once a month (except in January) at which it sets the official cash rate. That cash rate helps determine how much financial institutions, such as banks and other lenders, set their interest rates at. Generally the interest rate you are charged is above the cash rate, because there are a range of other factors which can also impact the cost of lending money.

Because the cash rate and the cost of lending money can change regularly, a variable rate loan is the type of loan where the lender can change the interest rate at any time to reflect these changes.

Lenders do also offer a kind of loan that has a set interest rate that doesn’t change over the life of the loan. That kind of loan is called a fixed rate loan.

Car loans can either have fixed or variable interest rates. Depending on the market conditions, fixed rate car loans may have a different interest rate than their equivalent variable rate car loans.

As with all loans, the interest rate is not the only thing you’ll need to consider when comparing the various options open to you. Some car loans may have an application fee, monthly or annual fees, early repayment fees, extra repayment caps, late payment fees and other fees that aren’t obvious at a glance.

The one additional cost consideration that’s unique to car loans is that many lenders may only offer loans for cars or other vehicles that are younger than a certain age. The maximum age varies between lenders. It’s usually no older than 20 years but many lenders can cap the age at around seven to 12 years old. So, if you’re looking for a loan for an older car, your choice of loans may be reduced.

Applying for a car loan is fairly straightforward. You’ll need to fill in an application form and provide details of your personal and financial situation, so your prospective lender can assess whether you’ll be able to repay the loan. Most banks have online applications, so you can preview the form. Other kinds of lenders may have an online application, but paper forms are still around in some sectors.

Most applications will ask you to provide the following details:

• Your income
• Whether you have any other debts
• Your other expenses
• Whether you’re single or have a partner
• Whether you’re borrowing by yourself or with someone else
• Whether you have any children or other dependents

When assessing your application, most lenders will also look up your credit history and credit score. Your credit score is a number that indicates how trustworthy you are when it comes to repaying debt. There are a range of sites available which allow you to check your credit score, just check the terms of the site before you use it.

Your credit score is one factor which could help you get a sense of whether a lender might be willing to give you a car loan. Car loan calculators can be a useful tool to help get an estimate of how much you might be able to borrow.

You can probably see now why there’s no single best car loan. Every option has advantages and disadvantages, which have different impacts on each of us. With that in mind, one way to find a suitable loan is by comparing a range of options available. Here’s a great way to do that.

First things first. Answer these general questions:

• Why do you want the loan?
• How much do you want to borrow?
• How will you repay the loan?
• How much can you afford to pay each month to repay your loan?
• Is the amount you can afford to pay likely to change during the loan term?
• Do you think interest rates are likely to go up, stay the same or go down?
• Over what period do you think interest rates will perform in that way?

• What is the interest rate?
• Is the interest rate fixed or variable?
• What other regular fees will you be charged?
• Is there an early repayment fee?
• What is the late payment fee?
• Are there any other ad-hoc fees?
• What’s the minimum loan amount?
• Does the lender offer or require a balloon payment?
• Does the lender offer any perks? (E.g. the flexibility to redraw repaid funds)
• Based on how much you want to borrow, how much you can repay each month, the fees and interest rate, what is the total amount payable to the lender over the term of the loan (the total cost of the loan)?
• How does the bank or lender that’s offering the loan align with your personal values?

To find out exactly how much you can borrow, you’ll need to contact the financial institution that offers the loan you want to apply for. They may ask you to submit an application to find out.

An alternative is to apply for car loan pre-approval, which will provide a better estimate of how much you may be able to borrow before you go car shopping.