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.
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:
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?
Are there application fees for car loans?
Are there ongoing monthly or annual fees?
What is the interest rate?
Is there a choice of fixed and variable interest rates?
Can I make extra repayments or lump sum repayments?
Is there an early repayment penalty?
Are there missed payment penalties?