Finding the best used car loan for you
Once you start searching for a car loan, you’ll notice there’s a fair few to choose from as most Australian banks and online lenders like peer to peer lenders will offer car loans that can be used to fund a used car purchase. So to help you become your own car loan expert, we’ve pulled together this short guide which answers all the questions you’ll have about finding the perfect car loan.
Is there a difference between a new and used car loan?
Yes there is. One of the major differences you’ll find when you start comparing car loans is that there are generally two types of car loans, secured and unsecured loans. With a secured car loan, you secure an asset ie, your new car against the loan. Most lenders will only offer secured loans for the purchase of a new car or a car that is less than 3 years old. The majority of used car loans are unsecured loans, which means that you don’t need to secure the loan against your car.
Secured car loans will have a lower interest rate than unsecured loans, so if you are getting your loan to buy a used car, it is a good idea to also look for a loan that has some flexibility with repayments so that you can reduce the amount of total interest you pay if you make extra repayments.
Fixed or variable rate, what’s the better car loan deal?
As you start to compare car loans, in addition to having the choice of a secured or an unsecured loan, you’ll also find that you have the choice between two different types of interest rates - fixed or variable. The interest rate you choose should depend on your personal circumstances.
- Fixed rates: If you choose a fixed rate loan, you’ll be ‘locking in’ your rate for entirety of the loan term. This means that no matter how the market moves, your interest rate and repayments will always stay the same. One of the downsides to a fixed rate loan is that if you get ahead on your repayments you may have to pay a fee if the loan is repaid early.
- Variable rates: On the other hand, variable interest rates change in accordance to the market, and can either rise or fall during your loan term. With this type of interest rate, there is rarely an early repayment fee and no exit fees, so if you can you’ll be able to pay off your loan with no additional cost.
What is a comparison rate on a car loan?
Once you start shopping around on car loans you’ll notice another rate sitting beside the interest rate in our tables, this is called the comparison rate. A comparison rate gives you a more accurate idea of the ‘true’ cost of the loan by taking into account not only the interest rate on the advertised loan, but any fees that may be charged with the used car loan. Just be aware that the advertised comparison rate is only a guide, the actual comparison rate for your used car loan will depend on your loan amount and the loan term.
What features should I look for in a used car loan?
Like any time that you are going to be borrowing money, the most important features to consider are the ones that are going to help you to save money. They include:
The loan term
With most used car loans, you’ll get to choose the loan term that you’d like to repay the loan within. This can be anywhere between 1 to 5 years for used car loans. The choice of loan term will usually come down to your ability to repay the loan. The shorter your loan term, the higher your repayments will be.
To look at the difference between the cost and repayments between a 3 and 5 year loan, let’s look at the following scenario:
Loan amount: $15,000
Interest Rate: 6.99%
Repayment frequency: monthly
On a five year loan with these terms, you would pay a total of $2,817 in interest with a monthly repayment of $297, whereas a three year loan would see you only pay $1,671 in interest but you would have a monthly repayment of $491.
Fees - Upfront vs Ongoing
Like any loan, there are usually some fees attached to used car loans. Some of the fees a car loan may have include:
- Upfront fees
- Ongoing fees
- Annual fees
- Late repayment fees
- Early repayment fees
- Break fees (fixed rate loans only)
- Loan discharge fees
When you’re getting a used car loan, you are likely to pay some upfront fees. Upfront fees are a one-off payment you are charged at the time of opening your loan and depending on the lender can be between $0-$600. If you happen to find a car loan with a high upfront fee, make sure the interest rate and other features that you will be able to access outweigh this cost.
Ongoing fees are generally charged by the lender for the maintenance of your loan. While these fees can be as little as $10 a month, its important to remember that you will be paying these every month of your loan. So for instance, with a $10 monthly fee on a 5 year used car loan, you will pay $600 just to keep the loan going.
Flexible repayment options
Used car loans may also come with handy features that can give you a lot more flexibility with repayments, like extra repayments and redraw facilities. Having the option to make extra repayments towards your loan could really help you save in interest.
A redraw facility allows you to redraw any of these extra repayments if an unexpected bill comes up - but there may be limits to how much money you’ll be able to redraw, as well as a fee you may have to pay.