It’s no secret that cars can be expensive. When you factor in buying your new wheels, getting it on the road, and forking out for registration, insurance, and running costs, it's no wonder that so many Aussies consider getting a car loan when they’re in the market for a new ride.
If you were eyeing off a Toyota Hilux, Ford Ranger, or Tesla Model Y – all popular choices for new car buyers – you’ll probably be forking out tens of thousands of dollars. That’s where a car loan can come in handy.
Like home loans, car loans see a lender providing a borrower with a set amount of cash to purchase an item – in this case, a car. After they do so, the borrower will pay back the cash, plus interest, over a set period of time – typically between one and ten years.
If you’re wondering whether you can afford a new car loan, or are curious if your current repayments pass the ‘sniff test’, take Savings.com.au’s Car Loan Calculator for a spin. Find it above.
If you’ve still got questions or queries about this type of finance product, keep scrolling to learn more.
How much can you borrow with a car loan?
How much you might be able to borrow with a car loan will depend on many factors, such as your credit history, regular income, and the type of car you’re hoping to buy.
Typically, a lender will allow you to borrow a certain percentage of a car’s value. However, most lenders only offer car loans of between $10,000 and $100,000.
If you’re not after quite that much, a smaller personal loan might be more your style.
Fixed or variable rate car loans?
Beyond how much you want to borrow and how much you can afford to repay, there are a few other decisions that you’ll probably need to make when choosing a car loan.
Arguably the first is whether you want a fixed-rate loan or a variable-rate loan. Let’s break it down.
A fixed rate loan means your interest rate will stay the same for the duration of your loan, or for an agreed-upon time. That can provide peace of mind and potentially save you a decent chunk of cash, as your repayments likely won’t go up if interest rates rise after you’ve signed on.
On the other hand, the interest charged on variable-rate loans might fluctuate from time to time. That could be helpful if interest rates are lowered during the life of your loan, as your repayments could be reduced as a consequence.
Fixed & variable car loans for new cars
Secured or unsecured car loan?
The choice between a secured or an unsecured car loan also awaits would-be-borrowers. And once again, there are benefits and downsides to both.
Let’s first break down what it means to have a secured car loan. A borrower signing onto a secured car loan will be using their car (or another valuable asset) as security against their loan. That means if they fail to meet their repayments, their lender can repossess their car or asset to recover any losses.
But there is an upside. As secured loans are less risky for lenders, they often come with lower interest rates.
Unsecured loans, on the other hand, typically offer higher interest rates than their secured counterparts, but might represent less risk to a borrower who is crazy about their wheels.
What is a balloon payment?
If you’ve used Savings.com.au’s Car Loan Calculator, you likely saw the little section marked ‘balloon payment’.
A balloon payment is essentially a portion of a loan that a borrower doesn’t pay off until the end of the loan’s life. When it comes to car loans, balloon payments typically represent between 30% and 50% of the loan’s value.
CASE STUDY
Mary (32) lives in Perth, barracks for the Geelong Cats, and is the proud owner of a brand new MG ZS. Her snazzy new car cost her $24,000 and she took out a car loan to pay for it.
Mary signed up for a three-year secured car loan with a 7.5% interest rate. That would typically demand $746.55 a month in repayments. However, she’s hoping to save for an oversees holiday next year.
For that reason, she decided to snap up a loan with a 35% balloon payment, reducing her monthly repayments to $537.76. She reckons she can start saving again when she returns from her trip and have enough to cover the payment – which will come to $8,400 – by the time her loan expires.
While Mary has managed to reduce her regular repayments, she’ll also likely pay more interest over the life of her loan as her outstanding balance will remain higher for longer.
She’ll also face a ‘pop’ moment at the end of the three years when she’s asked to pay back the $8,400 in full – which could come as a shock if she’s not careful.
Lender or dealership finance?
Another choice hopeful car-buyers might have come across when contemplating finance is between securing a car loan through a lender or utilising dealership finance. The latter might appear particularly enticing due to a potentially lower headline interest rate and the convenience of your dealership organising your car loan for you.
When it comes to dealership finance, like any loan, it's important to look at the comparison rate. Unlike the advertised rate, the comparison rate offers a window into the true cost of a loan, considering the interest rate as well as various fees.
While the terms of dealership finance can be more negotiable than those of a traditional car loan, dealerships are more likely to only offer loans with a balloon payment. They also might only finance new cars and, of course, you’ll have to buy your car through a dealership to get dealership finance. Also keep in mind the dealer may charge more on the sale of the car itself to compensate for a seemingly great finance deal.
On the other hand, traditional lenders probably won’t entertain much haggling when it comes to a car loans' terms. However, they’ll likely offer greater choice in what kind of car you can buy and more flexibility in repayments and terms once you’ve signed on.
Can you refinance a car loan?
Yes, if you have a car loan you can refinance it! Sometimes, a borrower will find themselves holding a loan that no longer suits them.
Perhaps they’ve changed jobs and now, instead of just scraping through serviceability tests, they can pass them with flying colours. Or maybe they’ve paid off a substantial chunk of their principle and wish to reduce their repayments accordingly.
They might even find that their fixed interest rate, which was once a great deal, is now notably higher than others offered on the market.
There are probably dozens - if not hundreds - of reasons Aussies might want to refinance their car loan. And, fortunately, they generally can. Though, doing so might bring about additional costs.
Cheaper car loans for electric or low-emissions vehicles
Finally, if you have your eye on a ‘green’ car, like an electric vehicle or low-emissions car, you might be eligible for a lower-rate car loan.
Many lenders offer ‘green’ car loans with sometimes significantly lower interest rates in a bid to encourage drivers to reduce their environmental impact.
If you’ve found yourself suitably encouraged, you can compare many of the best offers for green car loans on the market right now. Then, when you’ve found the one for you, plug all the details into Savings.com.au's Car Loan Calculator up above.
