Used Car Loan Rates

What is a used car loan?

To help finance your ‘new’ set of wheels, used car loans are a type of personal loan that allows you to purchase a second-hand car that is typically over a certain age - up to approximately seven years old. One of the main reasons why lenders place an age limit on used car loans is that they seek to minimise or avoid risk. Lenders therefore want to be confident that the used car you intend on purchasing will outlive the length of the loan.

When you take out a used car loan, the loan provider will lend you the money needed to cover the purchase price of the car. From there, you are required to repay the loan amount, plus interest, in regular instalments over a set period of time agreed with the lender.

How to compare used car loans?

Like any form of finance, lenders will offer multiple products to service a variety of consumer needs. Therefore, it’s important to consider a range of factors when shopping for and comparing used car loans.

Interest rates

Car loan interest rates determine the amount of interest a borrower will pay over the life of the loan. If you choose a variable rate, your interest will move up and down at any time in line with the market. This means your loan repayments can rise or fall over the term of your loan.

Whereas a fixed-rate car loan means your interest rate will remain the same throughout your loan term. Essentially, your repayments will stay the same.

If you're not the greatest at saving and prefer your repayments to be more manageable, then a fixed rate could be right for you. If you're looking for greater flexibility, a variable-rate loan may be the better option.

Secured vs unsecured

When it comes to buying a used car, there are typically two loan types you can choose from.

A secured car loan is when a lender uses an asset (the car you're buying) as collateral against the loan. If you're in the position where you fail to meet your repayments, the lender has the right to sell or repossess the asset in order to recuperate its funds. Secured car loans will generally have lower interest rates than unsecured car loans, as they are considered to be less of a risk to lenders.

On the other hand, with an unsecured car loan, lenders do not require you to use your car as security. As this poses a much higher risk to the lender, it often means they will charge a higher interest rate, more fees, and probably won't be as lenient with who they lend to.

When it comes to used cars, age and condition are two key factors that can determine whether you might be eligible for a secured loan. If the lender isn't confident that the value of the car is enough to secure the loan amount, you may need to offer up an alternative asset as security or opt for an unsecured loan.

Balloon payment

A balloon payment is an agreed-upon lump sum paid to your lender at the end of your car loan term. While balloon payments are more commonly offered upon purchase of a new car, by making a lump sum payment at the end of your loan term, a balloon payment allows you to reduce your regular loan repayments. However, balloon payments generally make the loan more expensive overall.

Balloon payments are popular with car loans as they tend to provide more cash flexibility, particularly for people who may have other expenses to pay for the life of the loan.

Fees

Lenders will often charge a number of fees for providing finance products. Many loans require application fees, service fees or annual feels - all of which can vary depending on the lender. As an example, a loan with a $10 monthly service fee over 3 years will cost you $360, therefore it’s important to consider all the fees involved before choosing a used car loan product.

Pros and cons of used car loans

Pros

• The buyer doesn't have to pay the entire balance upfront: It is very rare when a consumer is able to buy a vehicle and pay off the entire amount at the time of purchase. Taking out a used car loan allows consumers to have access to the vehicle they need and/or want while paying the balance over time.
• Builds credit score: For those who use them responsibly and make their payments on time, a used car auto loan can be a good way to build credit history to help you establish a reputation as a trustworthy borrower. However, you shouldn’t take out a car loan just for this purpose. Most lenders prefer borrowers that don’t have any existing debt.

Cons

• Higher interest rates: When comparing interest rates against other loans like a new car loan or mortgage, used car loan rates are generally much higher.
• Depreciation: Vehicles are among the fastest depreciating assets money can buy. Generally, the vehicle loses value quicker than the loan is paid off, which means your car can potentially be worth less than the loan amount that is owing. It’s worth noting, however, that new cars tend to depreciate faster than used cars.

What to look out for when buying a used car

Buying a big asset like a car is a big decision for anyone. From choosing the brand, to the model of the car, then working out your finance, there’s heaps to wade through.

To help you find your perfect pre-loved car, here are some things to look out for when you’re on the hunt.

Research

Do your homework. You don’t want to buy the first car you see just because you didn’t have time to look around and choose the right one.

When looking for a used car, consider what type and model would suit your needs best, and which fits within your budget. It’s always a good idea to evaluate the strengths and weaknesses of each vehicle type you’re looking at - safety, reliability, fuel economy, running costs, etc.

Contact the seller

Arrange to have a chat with the seller to find out any details about the car that may not have been included on the advert.

You may want to ask the following questions during your call:

• How long have you owned the car?
• Why are you selling the car?
• Has the vehicle ever been damaged or in an accident?
• What is the car’s history?
• Is there any current damage to the exterior or interior?
• Was the car used by smokers?
• Can I take the car for a test drive?
• How detailed is the car’s service history and do you have the service book available?
• Can I get the car inspected before I buy?

Arrange an inspection

It’s always best to see before you buy.

Ask the seller whether they’d be happy for you to inspect the car at their home address. If they aren’t willing to show you the car, then something may be off.

Check the car and its history

The first thing you want to do when you’ve found the perfect vehicle is to check its history.

With the car’s Vehicle Identification Number (VIN), you can check the history of the car against the databases in the state in which it’s registered. From there you can find out whether it’s been stolen, encumbered by an outstanding loan, or even a previous insurance write-off.

If all goes well, the next step is to have a detailed look over the car in person before agreeing on the purchase. It can also be a good idea to have a mechanic conduct a thorough inspection to make sure you haven’t missed anything.

• Check underneath the body and bonnet for signs of rust etc.
• Check the gaps between the body panels are equal. If not, it could indicate the car has been in a crash and had poor repairs done
• Check the engine (this is where you usually have a mechanic help)
• Check the tyres to ensure they have plenty of tread
• Make sure all the seat belts are working
• Make sure the radio and all the switches and other features in the car work

Overall, you want to inspect the exterior and interior of the car to make sure it’s all up to standard.

Take the car for a test drive

When you take the car out for a test drive, there are a few things you may want to think about:

• Check the steering wheel for any free play, pulling to one side, or vibration
• Test the brakes to ensure the car stops smoothly and strongly
• Listen for any odd noises coming from the engine e.g. rattling or knocking sounds
• Check gear changes are smooth
• Make sure the radio and any other buttons within the car are in working order