Car Loan

What is a Car Loan? This is a secured personal loan used specifically to buy a new or used car or any other type of vehicle. Some lenders will provide you with an unsecured loan to buy a car, meaning you will get the cash loan which you would use to buy a car.

How do these two types of loans compare? A secured personal loan will have lower interest rates but you are required to take full comprehensive insurance on the vehicle before the loan is approved. With an unsecured loan the interest rate will be 2% – 3% higher than the interest rate for a secured personal loan, but you don’t need to take full comprehensive insurance on your car.

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The interest rate can be variable or fixed. In general, if you think you will repay your loan before the end of your contract, you should take a variable interest rate. If you would like to have lower monthly payments then you should opt for a fixed interest rate. Other fees and charges include an establishment (application) fee which can range from $50 to $250. Also some lenders will have a monthly fees for the duration of your car loan contract.

If you pay out your loan before the end of the loan contract you may also have to pay an early repayment fee. This fee will vary from one lender to another. You should also enquire if there are any missed payment fees, meaning each time you are late with your monthly payment you may be penalised with an additional fee.

Depending on the intended car use (ie. business, personal use, etc), car loans can be categorized as:
Standard Car Loans, Commercial Hire Purchase, Finance Lease, Novated Lease, Operating Lease, Chattel Mortgage

More to consider when looking for car finance

To obtain a car loan you may approach a lender directly such as banks, credit unions, building societies and private lenders. Many car yards offer car loans as well. You may also wish to contact a broker who will shop around for you and look for the best car loan available.

When looking for a car loan you should consider the following:

Can car loans be pre-approved?
Knowing your budget in advance will help you with negotiating the price of the car. Also, it will prevent you spending more money than you have.

Are there application fees for car loans?
Different lenders have different application fees. They may range from $0 to $250. In some cases you are better off to pay a $250 application fee and have a lower interest rate rather than have a $0 application fee and a high interest rate.

Are there ongoing monthly or annual fees?
Some lenders will you charge an ongoing monthly fee, they may call it an account keeping fee and it could be up to $15 per month.

What is the interest rate?
This is the obvious question when applying for a car loan. The higher the interest rate the more you will pay at the end of your car loan.

Is there a choice of fixed and variable interest rates?
If you are planning to make additional payments on your car loan, and in doing so pay off your loan more quickly, you should take a variable interest rate. A fixed interest rate is more suitable for you if your goal is to have your monthly repayments as low as possible.

Can I make extra repayments or lump sum repayments?
Make sure this is written into your car loan contract, so that you are not penalised if you pay your car loan early. The more extra payments you make the more money you will save and your loan will be repaid sooner.

Is there an early repayment penalty?
If there are penalties make sure the amounts are clearly outlined in your loan contract.

Are there missed payment penalties?
Again, different lenders will have different penalties for missed payments. Make sure that you know what they are.

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