Avoid the EOFY car sale trap: low interest rates don’t always mean low repayments
With the end of financial year - and the end of financial year sales - approaching, Aussies may be gearing up to splurge on a new car soon. But bargain-hunting drivers need to be careful of rising car loan costs when shopping this year’s sales.
A recent report from the Australian Automobile Association has revealed that loan repayments continue to make up the largest chunk of Aussie households’ transport costs, despite dropping interest rates.
According to the AAA’s Transport Affordability Index, in the first quarter of 2017 the average car loan interest rate fell from 6.25% to 5.75% in all capital cities, but loan repayments actually went up by almost $164 per year.
This increase was because lower interest rates were not enough to offset the fact that Aussies are shelling out more this year than in 2016 for the most popular new cars. Adjusting for these higher spends, the average cost of a new car used in the report rose by over $800, dragging average loan repayments up along with it.
“Some people think that falling interest rates means a free pass to borrow more money than they might have otherwise. But it’s important to remember that a higher loan amount means higher repayments,” said Mozo Data Manager Peter Marshall.
“That’s something to remember when you hit the end of financial year car sales.”
For example, according to Mozo’s car loan repayments calculator, with an interest rate of 5.75%, a 5 year loan of $15,000 means making monthly repayments of $288. A $25,000 loan at the same rate comes with $480 monthly repayments. That’s a difference of $1,530 in interest over the life of the loan.
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According to the AAA Index, car loan repayments were the cheapest in Hobart, thanks to relatively low upfront buying costs, but there wasn’t a lot of difference between the $123.48 weekly expense there, and the highest cost - $124.54 paid by Canberra car owners.
Sydney saw the biggest jump in car loan costs, moving from seventh to fourth most expensive on the list, with an increase of $123 a year.
The underlying lesson for drivers is, if you’re going to splurge on a new set of wheels at the EOFY sales, make sure you secure a car loan with the lowest possible interest rate, to offset the cost of the car itself. Head over to our car loan comparison table to check out some of the best offers available today.