What would be a good deal on a car loan?
A good loan deal would be one that matches the needs of the borrower at the lowest possible cost. This means it comes from a reputable lender and offers the following:
- The amount of money the borrower wants to buy a car.
- The lowest possible interest rate.
- Low fees.
- Allowance for extra repayments or early payout without additional fees.
- Some flexibility – such as the ability to change repayment schedules fairly easily.
Of course the above is an ‘ideal’ and not every borrower is will be able to get the exact loan terms and conditions they would like. There are certain things you can do however to get the best car loan deal for your needs. This is explained in more detail in the following sections.
How to find a car loan that matches your needs?
Start by doing a budget to see how much you could afford in repayments.
For this you need to consider your current salary, loan and debt commitments, and your ongoing expenses such as rent, bills, and food.
You should also factor in an estimate of running costs for the car you want to buy, such as fuel, servicing, registration and insurance. The RACV provides more information on how much it costs to run a car in Australia, based on data collected from surveys.
Once you have an idea of what you can afford in repayments you can start looking for the best car loan deals and offers to match your needs. There are several ways you could go about this. The next section explains this further.
How to compare and assess car loan deals and offers?
Before comparing loans, you need to take the age of the car you want to buy into consideration.
For a brand new car or one that’s only a few years’ old for example, you may be able to get a very good deal on a new car loan. This would be unlikely however for a car of, say, 10-15 years old. In this case you might need to get an unsecured personal loan, which would come with higher interest.
You should also consider lender options as there are a lot of organisations offering car loans out there. While it’s true that while the ‘Big 4’ banks provide reliability and familiarity they may not necessarily offer the best rates. You may in fact be able to get a better deal from a smaller bank, credit union or building society.
Another option for applying for a loan is through your car dealership. However, this could end up costing you more as they tend to go with their preferred lenders, which in turn reduces your choices.
Factors to consider when comparing loans include:
- Interest rates – it could be easy when comparing loans (such as on a comparison site) to focus on the interest rate, but there is a lot more to it. For a start, when comparing interest you should look at the ‘comparison rate’ rather than the advertised rate. This is because comparison rates include basic fees and show a more realistic picture of loan costs. Another issue is whether the interest is fixed or variable. With a fixed rate the repayments stay the same throughout, but with variable they could change (up or down).
- Additional fees – there can sometimes be additional charges on a loan, such as for paying it out early or making extra repayments. So make sure to look out for these.
- Pre-approval options – you may be able to get pre-approval for a loan before the funds come through. This is very helpful as you know how much you have to spend before you go car shopping.
- Balloon payments – some loans come with smaller repayments but then require you to pay a lump sum at the end. This could suit you but only if you can come up with the money when the time comes.
It’s important to note here that you don’t necessarily have to immediately accept what’s on offer from a lender. You may be able to negotiate a better deal in some instances. You could also take up the option of using a car loan broker to negotiate the best car loan deal on your behalf.
In any case, a lender will want to know that you can repay the loan and that you can prove your identity, so you will need to provide documents to confirm this. Lenders also look at credit scores which is explained next.
Why a good credit score is important for getting good car loan deals?
Your credit score reflects your history of dealing with lenders and credit. The higher the score the better for you, as you’ll be looked on more favourably by lenders and may be able to get a better deal.
A good score is one that’s above the average of around 500-600. You can check your score through various credit reporting agencies – Money Smart has information on how to do this.
How to calculate interest and repayments?
An online loan calculator tool can come in handy when comparing loans, as it allows you to quickly calculate interest costs and repayment amounts.
For example, with our car loan calculator, all you need to do is fill in the fields (loan term, interest rate, deposit amount and repayment frequency). This gives you an instant result on repayment amounts. It can also allow you to test out various scenarios before approaching lenders.
Is there a catch when it comes to cheap car loans?
Cheap car loans sound great but there could be a catch.
They could, for example, be only available in certain circumstances – such as for borrowers with a very high credit score, or for new cars or those over a certain value. They might also be limited to loans of a certain size, or have other conditions attached.
The important thing is to thoroughly check the details of any loan you are considering, to ensure you get the best car loan deals and offers for your needs.