Shaun McGowan
Purchasing a car is an
exciting time in your life...
But it’s also probably going to be one of the most expensive purchases you’ll make in your life, with the exception of your home. So it’s important you get the best car loan you can.
So what are your options... and how can you get the best and cheapest car loan for your needs?
Considering the average new car in Australia is around $30,000, many Australians take out a car loan to purchase their car - it’s common practice.
But you need to ensure you know the ins and outs of car loans before letting the excitement of buying that new car get in the way!
In this article you’re going to learn the smarts, including:
- What the best car loan is for you
- How to get approved (& fast)
- What the lowest car loan rates are 4. All the fees and charges (& what they’re for)
What is a Car Loan?
A car loan is a common type of finance used for the acquisition of both new and used cars - especially for private car buyers.
Most car loans are secured car loans - which is where the car you purchase forms the security over the loan. (This is not unlike the way in which your home is used as security, in the form of a mortgage, against your home loan.)
Typically the term (length of the loan) for car loans can be as short as 12 months, or up to seven years.
| Amount | Interest Rate | Term | Monthly Repayments | Total Interest |
|---|---|---|---|---|
| $30,000 | 8% | 5 years | $608 | $6,498 |
| $30,000 | 8% | 3 years | $940 | $3,843 |
Secured versus unsecured car loans
Using the car as security over the loan generally reduces the lender’s risk.
This allows the lender to pass on a lower rate of interest to you than if the loan were the ‘unsecured’ type.
Simply because the lender can repossess and sell the vehicle to recover any outstanding funds if you default on the repayments.
Lenders offering secured car loans have guidelines about the type of car that qualifies as security. In general, new cars qualify, as well as late-model used cars in good condition up to around 15 years old at the end of the finance term.
You should ask the lender what kind of cars qualify for a secured car loan.
Documentation and paperworkIn some cases, a secured car loan can also be used to refinance your existing car loan.
(This works well if your current interest rate is higher.)
There are some restrictions on the
ways the funds can be used:
For example, you might not be able to use them, in part, to cover the cost of registration or insurance, or for other purposes. (This is because the loan amount is linked to the value of the vehicle.)
If you opt for an unsecured car loan, the funds may generally be used to purchase any vehicle, and the funds may generally be used to cover associated vehicle costs.
Interest rates
Lenders assess loan applications based on a detailed profile of each applicant.
Items such as credit history, employment and residential stability, income, asset backing and other information allows the lender to calculate the relative risk involved in each particular loan.
The 5 'C's of credit:
1. Credit rating
Your track record of debt repayment, which is generally available from the major credit bureaus (such as Equifax, Dunn & Bradstreet, and Experian). This information includes a list of defaults, judgements, bankruptcies and related information, and is usually retained for a period of seven years.
2. Capacity
Your ability to repay the loan. This involves an assessment of your income and your current debts. (The lender will have specific guidelines about allowed debt-to-income ratios.) Lenders also factor in how long you’ve been in your current job, and your employment history/job stability.
3. Capital
This is any amount the you put towards the purchase of the car. A significant contribution reduces the risk of a default and increases the evidence of commitment to the transaction.
4. Collateral
This is any asset that is used to secure the debt (the car itself, in the case of a secured car loan).
5. Conditions
These represent the details of the loan transaction and include how the funds may be used, the interest rate and principal, early repayment, and other conditions.
Being evaluated in the context of the five Cs can be a daunting thing for a borrower.
However it’s an essential part of the loan application process because lenders need to mitigate risk (customers not making their repayments) in order to keep costs under control and thereby offer a fair deal to all borrowers.
Interest rates are based on the 5 ‘C’s of credit assessment. Applicants associated with the lowest assessed risks enjoy the lowest car loan interest rates. In general, interest rates increase as the risk perceived by the lender increases.
Secured car loans are generally available at significantly lower interest rates than unsecured loans. The following are examples of car loan interest rates in August 2018.
The following are examples of car loan interest rates in August 2018:
| Secured | Unsecured |
|---|---|
| 6.79% | 10.99% |
The secured loan represents less risk to the lender because in the event of a default, the lender can sell the vehicle to recoup any losses. In the case of an unsecured loan, no such right to the vehicle exists.
Variable vs fixed rate
Secured car loans are routinely available with fixed or variable interest rates. Each has different characteristics.
Fixed rate car loans are those in which the interest rate doesn’t change over the term of the loan. With these loans you generally cannot make additional repayments or repay the loan earlier than initially agreed.
Sometimes, penalties or restrictions are imposed for additional payments or early repayment. (For example, there might be an annual cap on any additional payments that you’re allowed to make.)
Additionally, fees might be charged against additional repayments or early discharge of the loan.
Variable rate car loans mean that the interest rate may change throughout the term of the loan agreement. Generally there are fewer restrictions and/or penalties for additional payments or early repayment.
Fees & charges
With any car loan, it’s important to assess the fees and charges (if any) in addition to the interest rate offered.
Typical fees might include an establishment fee once your loan is approved and you accept the offer, plus ongoing service or account-keeping fees, as well as fees for early repayment, discussed above.
Additionally, given that the car is the security over the debt in a secured car loan, the lender will require you to insure the vehicle for the term of the loan, and also to name them (the lender) on the insurance policy as an interested party.
Maximum and minimum car loan amounts
Lenders have policies and guidelines about the minimum and maximum amounts that are available for car loans.
The minimum you can borrow is normally $5,000. The maximum amount varies widely between lenders, and often depends in practice on your ability to repay the loan amount.
Lenders
Car dealers routinely offer car loans to their customers. One of the principal benefits to this form of finance is convenience - the dealership becomes a one-stop shop for not only the disposal of the old car and the acquisition of the new car, but also the loan that underpins the transaction.
Dealerships are heavily incentivised to sell their in-house finance to their car- buying customers. Significant commissions are often attached to these car loans, and this means the interest rate, together with the fees and charges often represent comparatively poor value to borrowers.
Many car buyers are unaware that the interest rate offered by car dealers is often negotiable.
| Pros | Cons |
|---|---|
| Convenience | Higher Interest |
| Can Negotiate | Not Flexible |
Banks
Banks are also a common source of car finance. You probably already have an established relationship with at least one bank, perhaps via savings or investments accounts, and/or a mortgage - and this can help streamline the application and approvals process.
Car loans from banks are often somewhat more flexible in relation to the terms and conditions.
For example, you may be able to pay the loan off early, or extend the term.
Note: Interest rates offered by banks for car loans are often higher than that offered by specialist car financiers. Nor is it generally negotiable.
| Pros | Cons |
|---|---|
| Compare Car Loan Lenders | Faster approval time |
| Lower Overall Cost | Not Flexible |
Brokers
Brokers generally have access to a pool of specialist car finance providers.
Using a broker allows you to compare your objectives as a loan applicant against a range of competing car loan products, to arrive at the car loan that suits you best.
Because a broker is familiar with the approval criteria of many specialist lenders, they’re able to provide specific advice about not only selecting the right financier, but also how to submit your application so that the required compliance is demonstrated, quickly and efficiently - reducing red tape and time-consuming requests for additional paperwork.
If you’re using a broker for the first time, you might find the process a little more time consuming, initially, compared with using dealer finance or finance from your bank, but often the benefit is a lower overall cost of the loan.
When selecting a car loan provider it’s important to consider the loan features you need (such as the capacity for early repayment without penalty) in addition to just the interest rate and the fees and charges.
You should also be realistic about the likely timeframe in which you will upgrade to your next car, and arrange the term of the loan to correspond with that.
| Pros | Cons |
|---|---|
| Compare Car Loan Lenders | Will charge a fee for service |
| Lower Overall Cost | Not face to face |
Documentation and paperwork
To streamline your application it’s a good idea to get the likely paperwork ready. Lenders and financial institutions typically need the following documentation to process your application:
Personal identification
such as a copy of your driver’s licence or passport
Proof of your income
such as copies of your tax return or recent payslips
Details of your current debts and expenditure
such as rent/mortgage, other loans and credit card details
Copies of bank statements
such as rent/mortgage, other loans and credit card details
Once you submit your application together with the required documentation, the approvals process is reasonably quick. Once approved, you simply provide an invoice for the car and the funds are transferred to the seller, settling the purchase, and the car is now yours.
Bad credit rating
Having a bad credit rating doesn't mean that you are ineligible for a car loan. Many lenders have teams that specialise in making car loans available to people with a poor credit rating and score. Learn more about bad credit car loans.
There are two key differences between conventional car loans and bad credit car loans:
1. Higher Interest
Because this kind of lending typically involves greater overall risk for the lender, so the interest rate is typically higher.
2. Additional Security
Sometimes, additional security over the loan is required (for example, a guarantor).
If you have a bad credit rating it’s important to realise that you’re not alone. Specialist car loan lenders are motivated to lend money to prospective clients in your position - provided you meet their approval criteria, which is designed to minimise risk.
Zero percent finance
Zero percent finance and other remarkably low interest rates are often used as a marketing tool, typically by car manufacturers during sales promotions.
In general, only a proportion of the car’s value is financed (typically about half the cost) leaving you with a ‘balloon’ payment at the end of the term, which is typically three years. This balloon either needs to be paid in cash, or refinanced.
Because the advertised rate is so low, the financier typically receives an undisclosed additional payment from the dealer, which is funded from the proceeds of the sale.
For this reason, the transactional price of new cars sold under these kinds of low- interest offers is often higher than it may have been had the car been subject to a conventional car loan at prevailing market interest rates.
Low interest finance, also called subvented finance, often represents comparatively poor value to consumers. So do your homework before jumping into an agreement!
Private sale car loans
Private car sales are the largest market of car sales in Australia - more cars are sold privately than any other.
Car loans are readily available used cars, from banks, brokers and specialist car financiers.
The application process is similar to that for traditional car loans, but because less consumer protection is available to buyers during the private sale process, it is recommended that you conduct additional investigation to protect your interest in the vehicle - such as an independent mechanical inspection and a CarHistory check to verify the prospective vehicle’s administrative details
You can find out more about buying a car privately here.
457 visa holder
Although car loans are generally only available to Australian citizens or permanent residents, there are car loans available for 457 visa holders.
The most important factor is the remaining duration of your 457 visa, which must be greater than the term of the car loan you apply for.
It’s important to realise that commitments to extend your employment and visa are not taken into consideration by the lender - the crucial factor is the remaining term of your 457 visa, approved by the Federal Department of Immigration.
In some cases, additional commitments may be required, for example a cash contribution towards the acquisition of the car.
Car loan applications for 457 visa holders are assessed on a case-by-case basis - and although the process is slightly lengthier than for an Australian citizen or permanent resident, in many cases 457 visa holders are successful in their car loan applications.
Although the process is slightly lengthier than for an Australian citizen or permanent resident, in many cases 457 visa holders are successful in their car loan applications.
Self employed?
If you’re self employed, a car loan can be a challenge - especially if your business is fairly new. Thankfully, there are some good options.
Firstly, if the car will be used in part for the business, you must have an ABN - so if you don't yet have yours, apply for your ABN before you apply for your car loan.
If you haven't yet lodged a tax return in your self-employed capacity, you might be forced to apply for a ‘low doc’ or ‘no doc’ loan, which are specialist lending products that often carry a higher interest rate.
You might be able to use what are known as ‘alternative verifications’ to verify your income in your application. (A lender might, for example, review your bank statements to verify your income.)
Your application might also be assisted if you are in a position to add some cash to the transaction, as this will reduce risk by cutting what lenders call the ‘loan to value’ ratio.
It will also help if you have a good credit history and can demonstrate the successful servicing of recent debt - for example, of a credit card.
If you haven't yet lodged a tax return in your self-employed capacity, you might be forced to apply for a ‘low doc’ or ‘no doc’ loan, which are specialist lending products that often carry a higher interest rate.
You might be able to use what are known as ‘alternative verifications’ to verify your income in your application. (A lender might, for example, review your bank statements to verify your income.)
Conclusion
If you’re thinking about getting a secured car loan, make sure you know the different options, and what’s best for your situation before committing to anything.
Most car loans in Australia are secured, but car loans can also be unsecured and come in all shapes and sizes - to cater for different needs.
Lenders take many factors into consideration before approving a car loan - such as your credit history, your income, your living situation, the type of car, the price, the interest type, the LVR and more.
Sure you may be able to save time by opting for a car loan from the dealer, but in the long run you’ll probably come out on top if you spent a bit more time up-front.
The tips above will help you get the best loan (and the best rate) for your needs.