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How to compare car loans and choose a lender
Written by
Shaun McGowanIf you’re going to get yourself a good deal, you need to shop around.
You can literally save thousands in interest and fees.
No one wants to pay more than they have to.
- The type of car loan you need
- The type of lender you apply with
- What makes up a good car loan
Comparing different types of Car Loans
Depending on your personal situation - such as whether you are using the car predominantly for personal or business use - there are a few alternatives worth considering, including:
Car finance where the loan is secured by the vehicle - i.e. used as collateral on the loan. This is the most popular and common car loan in Australia.
You’ll generally use a personal loan when the car you’re buying doesn't meet the guidelines of a secured car loan - this will generally come down to the age of the vehicle.
A novated lease is a car loan organised through your employer. You make repayments from your pre-tax salary (which can be a great way to save on costs). Not all employers offer this.
A chattel mortgage is the go-to car loan for businesses and sole traders. It can offer great GST benefits and depreciation.
A car lease is a type of vehicle finance where a lender will purchase a vehicle and rent it to the borrower over a fixed period.
Find the best deal on car loans
FIND YOUR CAR LOANHow do I compare lenders?
You can apply for a car loan with a bank, directly at a car dealership, or by using a vehicle finance broker.
Non-bank lenders have a simple online application process and competitive rates.
Banks take longer to process your application and may need more information than non-bank lenders, but might offer cheaper loans.
Car dealerships offer finance as a convenience. It’s unlikely to be the best deal or the cheapest, but it does mean you can get everything done at once.
Vehicle finance brokers are loan experts who can help you get a loan and can be very useful if you have poor credit. They’ll help find the right loan for what you need, but they’ll charge a fee which means they’re not always the cheapest option.
What do I need to look for when comparing car loans?
Comparing car loans by yourself can be difficult. There are lots of things you’ll need to look out for:
- The interest rate on your loan
- What type of interest it is (fixed or variable)
- How long you take out the loan for
- The establishment fee for your loan
- Any ongoing fees
- Early repayment penalties
- Brokerage fees - if applying through a broker or dealer
- Balloon amount - if applied to your loan
Seem like a lot? Let’s break it all down.
The interest rate on your loan
Interest is charged by your lender for borrowing the money. It’s essentially how much extra you’ll need to pay back on top of the amount you borrow.
It’s very standard that your repayments will have a fixed interest rate. Variable rates don’t really exist anymore.
How long you take out the loan for
This is also called the ‘term’ of your loan. Car loans are usually between two and seven years but most commonly 5 years.
The shorter the term, the less overall interest you will pay.
Loan Fees
The establishment fee for your loan
This is a one-time fee you’ll pay when applying. You may be able to negotiate this or simply choose a lender who doesn't have one!
Any ongoing fees
The worst type of fees. Try and avoid these where you can - they only add to the amount you have to repay. They’ll be disguised as monthly account keeping fees.
Early repayment penalties
Some secured car loans won’t allow for early repayments. If you plan to repay your loan in full before the end of your term, check to see how much (if anything) you’ll be charged.
Lenders will use these fees to make up for the interest charges they’ll miss out if you repay early.
Brokerage fees - if applying through a broker
A broker is someone who can help you find, compare, and apply for a loan. This can be super helpful if you have no idea where to start and you’re making a major financial decision.
Like all professionals, brokers usually charge a fee. This is either open and upfront or may be concealed by secretly increasing the interest rate with the lender.
Balloon amount - if applied to your loan
A balloon payment is a large, singular payment you pay at the end of your term.
You might consider a balloon payment if you want to try and lower your repayments throughout the term.
A balloon payment will not give you a lower interest rate or a cheaper total car loan amount. It will only lower your monthly repayment amount.
At the end of the term, you’ll either:
- Pay the balloon amount to the lender and clear the remaining loan amount, or
- Choose to refinance the remaining amount into a new car loan
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About the Author
Shaun
McGowan
Shaun McGowan
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.
*Information about comparison rates Comparison rates are designed to allow borrowers to understand the true cost of a loan by taking into account fees and charges, the loan amount and the term of the loan. The comparison rate is based on an unsecured fixed rate personal loan of $30,000 over 5 years. WARNING: Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.