5 car loan features to look for when buying your first car

So, you’re about to buy your first set of wheels but don’t know the first thing about car loans. Well, you’ve come to the right place! But, first things first… 

Lesson #1: Don’t make the rookie error of signing up to the first car loan that pops up on Google. If you want a competitive car loan with a killer rate and all the right features, then shop around!

Let’s get one thing straight, the features that come with your car loan are what separate a good loan from a bad one - so they should never be overlooked.

Here’s a rundown on some of the top features you should look for in a car loan:

1. Lock in a low interest rate

When you take out a car loan to pay for a new or secondhand vehicle, you won’t just have to pay back the amount you borrowed for the car - you’ll also be charged interest on top.

Which is why it’s important to find a loan with a low interest rate. The lower the interest rate, the less interest you’ll need to pay on the loan. A low rate can really make all the difference - For example:

Scenario:

Indiana’s looking for a car loan to help her buy a brand new car. Using Mozo’s car loan comparison calculator, let’s compare two car loan options.

Option 1: By clicking on the first result in Google (rookie error) Indiana found a $30,000 car loan with a 9.30% p.a. fixed interest rate and a 7-year loan term. Let’s use Mozo’s car loan comparison tool to see how much her regular repayments would be, plus her total interest over the life of the loan.

• Monthly repayments: $487
• Total interest paid: $10,929

Option 2: After comparing car loans on Mozo (wise move Indi) Indiana found a $30,000 car loan with a 3.97% p.a. fixed interest rate. Here’s what her regular repayments and total interest over 7-years would look like by going with option 2.

• Monthly repayments: $410
• Total interest paid: $4,411

Total savings: By going with option 2, Indiana could potentially save $6,518

So, moral of the story: Always look for a loan with a low interest rate!

Fixed vs. variable interest rate:

Another thing that you’ll need to decide on when picking out a car loan is whether you want a fixed or variable interest rate. The type of rate you opt for can influence the cost of your loan, so it’s definitely something you’ll need to consider carefully.

• Fixed interest rate: By choosing a fixed rate loan, you’re essentially locking into the one rate for the life of your loan. This might be ideal for you if you like to have certainty that your interest rate and repayment amount won’t ever change which can make budgeting a little easier. One of the downfalls of a fixed rate, however, is that you could potentially cop a fee if you try to pay your loan off early.
• Variable interest rate: Variable interest rates fluctuate according to the market, which means that your interest rate and car loan repayments could increase or decrease throughout your loan term. On the flip-side, variable rate loans usually don’t charge early repayment or exit fees if you pay your loan off early.

2. Look for little to no fees

Depending on the car loan lender, you could be charged you a range of different fees, such as:

• Upfront application fee: A one-off application fee (A.K.A. a ‘set-up’ or ‘establishment’ fee) you might be charged when you take out your car loan.
• Ongoing fees: Depending on the lender, you might be charged a regular monthly service fee, annual fee or other ongoing maintenance fees.
• Late payment fee: Lenders often charge a late fee (can be anywhere upwards of $30) if you miss or are late to make a repayment.
• Break cost fee: Some lenders will charge a break cost fee if you want to pay out your loan in full before the loan term is over (generally more common with fixed-rate car loans).
• Discharge fee: You might be charged a discharge or closing fee at the end of your loan term, to cover any costs associated with terminating the account.
• Early payout: Depending on the loan, you could be charged an early payout fee if you default, transfer, or pay off your loan before the end of the term.

Fees can really add up over time, so they’re an important factor to consider picking a loan.

3. Flexible loan term options

The length of your loan can impact the total amount of interest you pay. Put simply, the longer the loan term, the more interest you’ll pay. Depending on your circumstances, opting for a shorter loan term could potentially save a decent chunk over time.

Scenario:

Austin wants to take out a $15,000 car loan with a 4.67% p.a. interest rate to help him buy a new ride.

Option 1: Using our car loan repayments calculator Austin found that by opting for a 7-year loan term he’d pay the following:

• Monthly repayments: $210
• Total interest paid: $2,614

Option 2: Alternatively, by reducing his term down to 5 years, this is what he’d be looking at:

• Monthly repayments: $281
• Total interest paid: $1,848

Verdict: By going for a 5-year loan term, Austin’s repayments would only be $71 more per month, but he’d save a whopping $766 in interest over the life of the loan.

Remember, while shortening your loan term can save you more over time, it all depends on your individual circumstances and whether you can afford to make bigger repayments in a shorter time frame.

4. The ability to make extra repayments

Another great feature is having the ability to make extra repayments so you can pay your loan off faster. Here’s a scenario to give you an idea of what making extra repayments could save you:

Scenario:

Sahara currently has a $30,000 car loan with a 5.14% p.a. interest rate and a 5-year loan term.

Option 1 (No extra repayments): Using our car loan repayments calculator we found that without making any extra repayments Sahara will pay her loan off in 5 years with the following:

• Monthly repayments: $568
• Total interest paid: $4,084
  

Option 2 (With extra repayments): After receiving a $1,500 tax payout and $500 worth of birthday money, Sahara decided to make a $2,000 lump sum payment on her car loan (in the first year of her term). By doing this, she’ll shave 4 months off her loan, thus:

• Total interest paid (with extra repayments): $3,752
• Interest saved: $438

Just be aware that some lenders will charge a fee when you pay out your loan ahead of time, so be sure to check this first.

5. A redraw facility

If your lender allows extra car loan repayments, then they might also offer a redraw facility which lets you dip into any extra repayments you’ve made should you require access to additional funds.

Just keep in mind that dipping into any extra repayments you’ve made really defeats the purpose of making them in the first place, so try to only use this feature in an emergency. 

Also, be sure to check whether the redraw facility is free or if you’ll get charged a fee for using it - and find out whether or not there is a minimum redraw requirement.

Starting comparing car loans today so you can be one step closer to cruising around in your new ride. To learn more about buying your first car by checking out our guide to getting your first set of wheels.