The first step to finding a cheap car loan deal is to look for one with a low-interest rate. When you start comparing car loan interest rates you’ll soon notice that there are two interest rates displayed next to the loan: the headline rate and the comparison rate. But what’s the difference?
The headline rate, which is usually the main rate you’ll see advertised on a loan, is the interest rate the lender will charge you for taking out the loan.
Now the comparison rate (usually sits next to the headline rate) is the one you’ll want to pay close attention to if you want a more accurate idea of the true cost of the loan. The comparison rate factors in both the headline rate plus any other extra fees that may be charged on top.
However, be aware that the advertised comparison rate tends to be more of a guide as it’s usually based on a set figure (e.g. a $30,000 loan repaid over 5 years). The actual comparison rate of the loan that you apply for will be different as it will be based on your exact loan requirements.
Understand your loan costs by crunching the numbers in our free car loan repayment calculator.
Is a fixed or variable interest cheaper?
Speaking of car loan interest rates, another decision that can influence the overall cost of your car loan is whether you opt for a fixed or variable interest rate. Here’s the difference:
Fixed interest rate car loan:
With a fixed-rate loan, you’re ‘locked-in’ to the same interest rate for the entire loan term. The pro is that your interest rate and repayments will stay the same regardless of how the market moves - making it easier to budget for. The con, however, is that fixed-rate loans often have break fees if you decide to pay out your loan earlier than the fixed term in the contract.
Variable interest rate car loan:
Alternatively, you might opt for a variable interest rate which moves with the market and can potentially increase or decrease during your loan term. A bonus though is that variable-rate loans don’t usually charge early repayment fees, so you might be able to pay your loan off early without being penalised for it.
Is a secured or unsecured car loan cheaper?
Another factor that can influence the cost of your car loan is whether you go for a secured loan or an unsecured loan.
Secured car loans:
With a secured car loan, you’ll be required to put up an expensive asset (your new car) as security in case you ever default on the loan - in which case the lender could potentially repossess your asset to cover the cost of any missed repayments. With a secured loan you'll usually need to be buying a new car or one that’s generally less than 3 years old.
The benefit of a secured car loan is that they often come with cheaper interest rates than unsecured loans, meaning you could save some extra cash on interest payments.
Unsecured car loans:
With an unsecured car loan, you won’t be required to put up any assets as security against the loan. The downfall with this is that unsecured loans are generally more expensive because lenders usually offer more competitive rates to borrowers who secure their loan with an asset.
What kind of hidden fees should I be wary of?
The next thing to look out for when trying to find a cheap car loan is fees. Overtime fees can really add up, so try to find a loan with minimal fees, or better yet, no fees at all. Here are some common car loan fee charges to be aware of:
Some lenders will charge an upfront application fee when you take out a new car loan. Depending on the lender, this fee can be anywhere between $0 and $600. If you do decide to go with a loan that has a high upfront fee, then just be sure that the loan features and interest rate will balance out the cost.
Some lenders will charge an ongoing loan maintenance fee. This fee is usually only around $10 or so a month, but keep in mind that it’ll add up over the life of your loan. For example, a $10 monthly fee on a 5-year loan would eventually add up to $600.
Late repayment fees
Loan discharge fees
Early repayment penalty/break cost fee: Some fixed-rate car loans allow you to make extra loan repayments to help you pay off your loan quicker. However, if you do try to pay your loan off early then, depending on the lender, you could be charged a break cost fee (this only applies for fixed-rate car loans).
Does the length of the loan affect how cheap it is?
Yes, it can. By opting for a longer loan term your regular repayments might become cheaper, but you’ll wind up paying more in the long run because you’ll have more interest payments to make.
By opting for a shorter loan term, your regular repayment amount will be higher, however, you’ll pay less interest over time. At the end of the day, it all depends on whether you can afford to make bigger repayments now so you can pay less interest in total.
Using the car loan repayment calculator we found that if you took out a $30,000 car loan with a 6.58% p.a. interest rate and a 5-year loan term, your monthly repayments would be $588 and you’d pay $5,287 total interest over the life of the loan.
However, if you reduce the length of your loan term to 3 years, your monthly repayments would be $921 and you’d pay $3,140 total interest instead. That’d save you $2,147 in interest charges!
What factors decide how cheap my car loan will be?
Other factors that can determine how cheap your car loan will be are the features it comes with. On top of choosing the right loan term, rate type and finding a loan with no/minimal fees, there are a few other features to look for that can really help bring the cost down, such as:
Extra repayments facility:
Having the flexibility to make extra repayments means you can potentially pay your loan off faster and save on interest. Not all loans come with an extra repayments facility, so be sure to double-check that the loan you’re considering offers this feature if it’s something you’re keen on before applying.
Flexible repayment options:
Some lenders give you the choice of either weekly, fortnightly or monthly repayments. This means that you’ll have the freedom to tailor your repayments around your regular pay schedule. So if you get paid weekly, then you might opt for having your car repayments debited weekly instead of monthly.
Another great thing about flexible repayments is that you could potentially save some money by opting for fortnightly repayments as you’d wind up paying a month extra within a one year period.
For example, there are 26 fortnights in one year, so if your car loan repayments were $500 a fortnight, you’d end up repaying $13,000 in one year. Whereas if you made monthly repayments you’d be paying $1,000 per month, which would only equate to $12,000 a year.
Tier-based interest rates:
When you start comparing car loans you’ll find that some banks and lenders offer tiered interest rates which are based on your credit history. The beauty of this is that if you have a solid credit score then you could potentially score a better interest rate on your loan.
Which is the best bank or lender for a cheap car loan?
There isn’t necessarily one specific bank or lender that’s best for getting a cheap car loan with. It ultimately depends on which provider offers the right loan option to suit you and your individual needs.
The best way to find this is to shop around and compare car loan products until you find one that has the features you want at a price you can afford.
2019 Mozo Experts Choice Award-winning Car Loans:
A great place to start your search is with a 2019 Mozo Experts Choice Personal Loan Award-winner.
To pick the winners of the 2019 Mozo Experts Choice Personal Loan Awards our Mozo Expert judging panel conducted an in-depth analysis of 286 personal loan products from 78 Australian financial institutions, assessing each on an extensive range of criteria (read about it in our methodology report).
For the Car Loan category, calculations were based on the cost of a $30,000 new car loan including principal, interest, fees and charges repaid over 5 years.
Here are some of the winning loans that ranked cheapest for buying a new car:
Head to the 2019 Mozo Experts Choice Personal Loan Awards landing page to see the full winner list.