Canstar News - December 6th
ASIC Deputy Chairman, Peter Kell has called it an example of the staggering cost of poor business practices: BMW Finance, the finance arm of BMW, has been hit with an Enforceable Undertaking (EU) implement Australia's largest consumer credit remediation…– Read more
Car Loans - November 8th
CANSTAR Research Analyst Jack Smart lets us in on the best tips for buying a car loan, and potential traps to watch out for.– Read more
Car Loans - November 4th
Note: At CANSTAR, we don't claim to be experts in cars (we're more familiar with the financial side of things), so for each vehicle, we've cited the opinions of car review specialists from CarsGuide, CarAdvice and Drive.com.au.…– Read more
A car loan is a loan taken out for the purpose of buying a motor vehicle such as a car, ute, 4WD, motorbike, or other road vehicle. A car loan can also be called a vehicle loan. If you don’t have enough in savings to afford to buy a car but you can afford to repay a loan in monthly installments, you might consider using a car loan to finance your new wheels.
A car loan is a common type of personal loan. Personal loans as a category covers a much broader range of loans (e.g. debt consolidation, home improvement, study costs, weddings), so we compare personal loans separately on our website. We’ve considered the pros and cons of buying a car with a car loan or using a personal loan instead here.
Car loans may be offered by financial institutions as a standalone car loan, a personal loan, or via the redraw facility or line of credit on a home loan. You can also get a car loan from peer-to-peer (P2P) lenders and car dealers. Where you choose to go could have a big effect on the interest rate you pay on your car loan.
When you take out a car loan with a financial institution such as a bank or credit union, it’s easy to compare what’s available on the market (especially on the CANSTAR website) and find the best option for your budget.
Part of the appeal of a car loan is that they can usually be approved by financial institutions quickly, so if you find a car you like, you don’t have to risk someone else driving away with it. Most financial institutions are able to approve or deny a car loan in 48 hours.
You can even get a Novated Lease, where you salary sacrifice to buy a car. There’s a common myth that the car must be for work purposes but in fact you can salary sacrifice to buy a car entirely for personal use. Once your employer has filled in the initial paperwork, the monthly repayment is paid automatically by your employer from the salary sacrificing amounts that come out of your pay.
If you have a mortgage on your home, you might be able to dip into your mortgage via a redraw facility or a separate line of credit to borrow the money to buy a car. This can have two benefits: home loan interest rates are often lower than car loan rates, and having both your home and car loans rolled into one monthly repayment is convenient and easier to budget for.
However, a redraw or line of credit purchase could cost you more over time than an ordinary car loan would have, unless you make extra repayments to your home loan to account for the extra debt. This is because car loans typically have a 5 year loan term, so if you don’t pay back the redraw or line of credit within that time, you end up paying more in interest over the long run.
Peer-to-peer (P2P) lenders are amongst the biggest disrupters facing the banking sector. Essentially, the lenders are investors seeking a return on their cash. Major P2P lenders in Australia such as SocietyOne and Ratesetter currently offer personal loans which can be used for buying a car.
Most car dealerships will offer on-site financing for their cars. Sometimes these dealers will offer interest rates much lower than what the banks are offering. Also, it can seem quite convenient getting all the paperwork done then and there when buying the car.
But you should be wary that dealers might sometimes mark up the price of the car to account for the lower interest rates they’re offering. And you might have more bargaining power if you went to a car dealership with a pre-approved car loan from a bank, as opposed to seeking out the dealer’s financing options straight away.
Your credit rating is the number that a financial institution looks at to decide whether or not you’re an investment risk. You should obtain a copy of your credit report before you apply for a loan, to find out your credit rating and make sure you won’t encounter the nasty surprise of your application being rejected. Being rejected for a loan creates a black mark on your credit history all by itself, making it harder for you to obtain credit or loans in the future.
Thankfully, you can order a free copy of your credit rating from the following organisations:
Have your paperwork ready to make the process easier when you’re applying for a loan. A financial institution will generally want you to provide:
What is loan pre-approval? Some people like to know whether they will be able to get a car loan before they start car hunting. They want to know how much they can spend without worrying about negotiating the price of the vehicle along with the terms of their loan. That’s why some people seek out pre-approval for a loan – that is, getting approved for a loan (but not actually receiving the money yet) before finding a car. Pre-approval is only valid for a limited time, generally one to three months.
Car loans are repaid with monthly repayments and have a defined “loan term” – a timeframe in which the loan must be paid off. At the time of writing, the usual loan term for car loans on our database 5 years but may be up to 10 years. Interest is charged on the remaining balance of the loan until it is fully repaid.
The interest rate you pay on a car loan can be variable or fixed.
Car loans that are offered on a fixed rate for the life of the loan means repayments remain the same, so it’s easier to budget for them. But there may be additional fees involved if you want to make extra repayments and pay out the loan early.
In contrast, the repayments for a variable car loan change whenever the lender changes its interest rate. You’ll feel like a winner when they lower their rates, but you’ll be kicking yourself if they raise them to higher than the fixed rate.
Can I make extra repayments? Car loans have a set repayment schedule. Many car loans, however, allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan as well as the overall cost.
Car loans can be secured or unsecured. Most car loans for a new car or a young-enough used car are a secured loan, where the car you are buying with the loan is the “security” for the loan. This means if you fail to repay the loan, your lender can sell the car in order to pay your debt. Because the loan is secured, the risk to the lender is lower, and this is usually reflected in a lower interest rate than for an unsecured loan.
Most car loans for an older car are an unsecured loan, where the lender agrees to lend you the money without any security and simply relies on your credit-worthiness and ability to repay the loan. This means if you fail to repay the loan, the lender has to take you to court to recover your debt. Unsecured car loan applications may be harder to have approved, and people with a poor credit history may have less chance of being approved. Because an unsecured loan represents a higher level of risk for the lender, the interest rates on this type of loan are usually significantly higher.
Essentially, no one can see the future but you need to make sure you can afford to repay your debt. Nobody wants to end up in a situation of being in debt and unemployed.
Written by: TJ Ryan
The cost of a car loan depends on how much you borrow, how long the loan term is, and the interest rate charged on the balance of the loan.
Taking on a car loan is not a decision to take lightly and you should always carefully consider your budget before taking on the debt. But if you can easily afford the monthly repayments, and the overall cost of the loan is reasonable (see below: “How much does a car loan cost over time?”), it may be a helpful way to purchase a vehicle.
CANSTAR researches and rates more than 150 car loans, and the interest rates vary significantly. Our historically low official cash rate is certainly a benefit; currently on our database, there are car loan interest rates as low as 5.99% and comparison rates as low as 6.20% (at the time of writing).
At the time of writing, our comparison table for car loans shows that of the car loans on our database that are available for buying both new and used cars, interest rates on offer vary widely:
That’s a huge difference between the minimum and maximum interest rates on offer! So it makes sense to do your homework before you sign up for a car loan, otherwise you could end up paying hundreds or thousands of dollars more than you need to over time.
CANSTAR can help you there, as we regularly research and rate car loans for the value they provide consumers. As interest rates regularly go up and down, you should compare car loans on our website to find what loans have our 5-star rating for outstanding value.
Our research shows that people comparing car loans on our website are looking for a car loan of the following amounts:
Using our Car Loan Repayment Calculator, we’ve calculated how much the monthly repayments would be for a car loan with an interest rate of 8.00% p.a. Of course, the actual cost of buying a new car is much more than just the loan – there’s petrol, registration (rego), CTP, car insurance and roadside assistance, tolls, and servicing. So we’ve added on those costs using the MoneySmart Cars Mobile App to give you a more realistic picture of how much you really need to budget for your new car:
|Cost of a New Car:
With a Car Loan vs. Without a Loan
|Purchase Price||Cost of Car||With Car Loan||Without Loan|
|Total Cost After 5 Years||$37,996||$24,200|
|Total Cost After 5 Years||$44,140||$29,250|
|Total Cost After 5 Years||$50,284||$34,300|
|Total Cost After 5 Years||$62,571||$44,400|
|Total Cost After 5 Years||$74,859||$54,500|
|Total Cost After 5 Years||$87,146||$64,600|
|Source: CANSTAR Car Loan Repayment Calculator; MoneySmart Cars Mobile App.
Loan costs based on an interest rate of 8.00%, 5-year loan term,
Keep in mind that if you choose to buy a used car, then with or without a car loan your costs will be slightly lower because you will not pay stamp duty on the car. However, a used car can eventually raise the repair-or-despair question due to its age or potentially misuse by previous owners.
So is it a good idea to borrow money for your set of wheels? There’s no absolutely “right” or “wrong” answer to that one and for a lot of people, particularly those saving for a home loan or paying their way through university, a car loan is going to be unavoidable. For others, some of the loan cost might be a tax deduction.
How to buy your next vehicle is a complex question and you should obtain personal financial advice before deciding whether or not you would be best to save up the cash or take out a car loan. However, there are some things you can keep in mind when making your decision:
Never rush these decisions. A car loan is not just about getting a new car or upgrading to your dream car – it is about all the costs and benefits involved in obtaining and maintaining the vehicle.
Some of the pros and cons of car loans are worth thinking about before deciding whether or not a car loan is right for your circumstances:
Benefits of a car loan:
Disadvantages of a car loan:
If you want a car loan that helps you, not just your bank, you need to set up a game plan before you apply. The majority of Australians – 59% of people surveyed by Canstar Blue in 2016 – say they are more likely to take out financial products such as loans with the institution they usually bank with. But you should always compare car loans to find the best loan for your situation.
Stick to the amount you want to borrow and resist the bank’s offer to sell you more credit. You made a budget for a reason, and you don’t want to end up in debt or paying too much interest because the loan is bigger than either your budget or your needs.
Keep in mind that your car is a depreciating asset. The value of your car is going to decrease over time – possibly as soon as you drive it out of the showroom. So whatever you do, don’t overextend yourself financially, or you could end up owing a whole lot more than your car is worth. Just because you can borrow a certain amount doesn’t mean that you should.
Remember to factor in fees and charges when calculating your budget. Application fees on a car loan range from $0 to $575 at the time of writing, with an average fee of $152 as of our 2015 star ratings.
Beware of other fees that aren’t listed on the website but are hidden away in the product disclosure statement (PDS). On average, 1 in 3 of Australians surveyed by Canstar Blue in 2015 said they had been hit by unexpected bank fees or charges.
If you don’t have a written budget already, try using our Car Loan Repayment Calculator to factor in how much a car loan would add to your current expenses. You need to make sure that you can afford to pay your rent or mortgage, put petrol in your car and food on the table, pay your bills, and pay your monthly repayments on a car loan. Also try to plan ahead for things like how your budget would cope with unexpected medical expenses or having to take unpaid leave.
Shorter loan = higher monthly repayments. Longer loan = lower monthly repayments but you pay more in interest. You should choose the shortest loan term that you know you can comfortably afford.
Make sure there is no penalty fee charged if you repay your loan early. Most lenders don’t charge one, but those who do charge fees ranging from $20 up to $800, with an average early repayment fee of $197 as of our 2015 star ratings.
Secured loans give you a lower interest rate but there’s a risk of losing the property you choose to use as security if you don’t meet your repayments. Unsecured loans have a higher interest rate so you might end up paying more in interest over the life of the loan.
Secured or unsecured, make sure you never miss a payment. A missed payment is a serious default and can put a black mark on your credit report, making it more difficult for you to get any credit or loans in the future. (But not impossible – see our website for tips on getting a bad credit car loan.)
Currently on the CANSTAR database, interest rates vary as follows:
And after you’ve chosen a car loan?
Check the ATO website to find out whether you claim accelerated depreciation on your new car. If you are a small business, you may be able to take advantage of the new immediate tax deduction for a business tool purchased up to $20,000. Find out more here.
Get a good car insurance policy! You must have compulsory third party (CTP) insurance when you buy a car – but that only protects you against claims for compensation if you injure or kill someone in a motor vehicle accident (specific conditions vary from state to state). It does not cover the cost of repairs to any vehicles or property – yours or anyone else’s. So consider a comprehensive car insurance policy – otherwise you may end up with a big debt, and no wheels! Compare the different types of car insurance here.
Choosing a car is fun – but make sure you put as much time and effort into choosing the financial products that you’ll need as well.
Please note that these are a general explanation of the meaning of terms used in relation to car loans. Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that loan. You cannot rely on these terms to the part of any loan you may purchase. You should refer to the product disclosure statement (PDS).
Account-keeping fee / Ongoing fee: A monthly account-keeping fee that is charged by the lender to help cover the administration cost of maintaining the loan.
Additional repayments: Extra payments that you choose to make to your loan on top of the minimum required repayments. See extra repayments (below).
Annual Percentage Rate: The total charge for the loan including fees and interest. This rate is expressed as a percentage so that you can compare rates across the market.
Application Fee: A fee charged by some lenders for the service of arranging and processing your loan application.
Asset: A resource that is controlled by a person because they own it or own an interest in it, and which will give them future economic benefits because of that ownership.
Automatic transfer: A system that is set up to automatically transfer money from a one bank account into another account at a certain point in time to coincide with bills or payments.
Balance: The amount remaining that has not yet been paid off on your loan. The opening balance is the balance of your loan at the start of a month or statement period. The closing balance is the balance of your loan at the end of a month or statement period, after all repayments have been taken into account.
Bankruptcy: This is when someone’s debt problems become so serious that they are unable to pay their existing debts and bills. When this happens, they can apply to a court to be declared “bankrupt”, and any assets or savings they have can be used to pay off their debts. Normally after one year a person can be discharged from bankruptcy, but it will still have a negative impact on their credit rating and may prevent them from getting credit or loans in the future.
Basis points: A basis point is equal to 0.01% interest. For example, 50 basis points is an interest rate of 0.50% or half a percent.
Borrower: The person borrowing money in a personal loan from the financial institution. Also known as a debtor.
Car loan: A personal loan taken out to buy a car for private purposes. Also known as a vehicle loan.
Caveat emptor: Latin for “let the buyer beware”.
Comparison rate: A rate that represents the total annual cost of the loan in a single figure, including the interest rate, payments, and most of the ongoing and upfront fees and charges. On the Canstar website, all comparison rates for personal loans are based on a $10,000 loan over 3 years.
Comprehensive Insurance: The highest level of car insurance policy, which covers your car for damage to the property of others, some limited cover for your own car if it is damaged or lost because of fire or theft, and accidental damage to your own car, regardless of who caused the damage. Comprehensive also has a range of optional extras, which may include replacement vehicles while you can’t drive your own car, and no-excess windscreen replacement if you have a crash.
Compulsory Third Party (CTP): A compulsory car insurance policy that covers you if you injure or kill someone in a motor vehicle accident. The specific conditions on this type of insurance are different from state to state. CTP must be obtained at the time of paying for registration of your vehicle.
Consumption loan debt: Debt for personal loans for things that are either fully used immediately or depreciate in value from the time they are bought, including cars, holidays, furniture, and other goods and services. Consumption debt does not include loan debt for property, business, investment, unpaid overdue bills and fines, and court-ordered damages payments.
Credit rating or credit score: A numerical score that represents the credit-worthiness of an individual or corporation, based on their positive and negative borrowing and repayment history. Your credit score is affected by whether you pay your bills on time, your current level of debt, the types of credit and loans you have, and the length of your credit history. Your credit score and credit report are used by lenders when deciding whether or not to lend to you, and are also used by lenders and insurers to set your loan and insurance rates. Find out how to check your credit score here.
Credit report or credit history: A report from a credit agency that contains a history of your previous loan and bill payments. Banks, lenders, creditors and financial institutions use this report to determine how likely you are to repay a future debt and whether or not they should lend money to you. Lenders can record a default on your credit file if you make loan repayments late. Every application for finance that you make is recorded, showing the lender you applied to, the type of finance, the amount, and the date. Find out more about what is included in your credit report here.
Creditor: A lending agency to whom you owe money. Also known as a lender.
Current Rate: The interest rate advertised by institutions, not including fees, discounts and special offers.
Debt: Money owed by one person (the debtor) to another person or financial institution (the creditor). Requires a contract between them requiring the debtor to pay back the money. A debt is also known as a liability.
Debtor: The person taking out the loan. See borrower (above).
Default: When a cardholder fails to fulfil their obligation to make the minimum required payments on their loan. Defaults are a serious black mark on your credit report and negatively affect your credit rating.
Drawdown: A drawdown is when a lender “draws down” the loan from their funds into your bank account, and you use the money. Interest typically starts being charged from the date your loan funds are drawn down into your bank account.
Drawdown Date: The date on which you first use the money loaned to you.
Equity: Where you have borrowed money to buy an asset, equity means the difference between the value of the asset and how much you still owe on it. This is known as a “residual claim to ownership”. For example, when an owner buys a car with a loan for $10,000 and has repaid $6,000 so far, the owner has equity of $4,000 on the car.
Extra repayments: Some car loans allow you to make extra payments earlier than the minimum required repayments, meaning you could pay off the loan sooner and lower the total you pay in interest. See additional repayments (above).
Fixed rate: A loan that lets a borrower “lock in” a particular interest rate for a period of time. During that time period, you pay the same interest rate every month in your repayments, regardless of whether the RBA official cash rate goes up or down. At the end of the fixed rate period, the loan will revert to a variable rate unless the lender and borrower agree to another fixed rate. Some loans have a fixed rate for their whole lifetime.
Interest rate: The rate at which the outstanding balance of your loan increases per month if it is not paid or not paid in full.
Lender: The financial institution offering the loan. Also known as a creditor (because they are offering an amount of credit).
Loan: An amount of money borrowed by one person from a financial institution, dealer, or peer lender. The amount must be repaid, and interest is charged on the amount until it is fully repaid.
Maximum loan amount: The maximum amount that you can borrow from the lender under the loan agreement.
Minimum loan amount: The minimum amount that the lender will require you to borrow from them under the loan agreement.
Minimum repayment: The amount listed as the minimum interest and repayment your bank requires you to pay off your loan for that month.
Ombudsman: If you have a dispute with your lender and haven’t been able to resolve it through the lender’s internal complaints resolution process, you can contact two free Ombudsman services to help you depending on what kind of lender gave you the loan. The Financial Ombudsman Service (FOS) helps people resolve disputes with their bank or financial institution about loans, credit, or banking. Anyone can call them on 1800 367 287. The Credit and Investments Ombudsman (CIO) handles complaints about non-bank lenders, credit unions, building societies, mortgage and finance brokers, financial planners, lenders and debt collectors, credit licensees and credit representatives. Anyone can call them on 1800 138 422.
RBA official cash rate: The overnight interest rate that the Reserve Bank of Australia offers financial institutions to settle-up on inter-bank transactions. This cash rate influences the interest rate that banks offer to customers on credit and loan products.
Redraw: A home loan feature where the borrower can withdraw some of the funds they’ve already paid, if they are far enough ahead on loan repayments. The redraw feature is not available on all loans.
Repayment holiday: A borrower who is ahead on their repayments can apply to have a period of time where they make no repayments to their loan.
Secured loan: A loan where the borrower provides an asset as collateral or insurance for their debt. Because the loan is “insured” or “guaranteed” by this security, secured loans usually have lower interest rates than unsecured loans.
Universal default: When one financial institution treats a lender as if they had defaulted when the lender defaults with a different institution.
Unsecured loan: A loan where the borrower does not provide any asset as collateral or insurance for their debt. Because the loan is not “insured” or “guaranteed” by any security, it is a higher risk, so lenders charge higher interest rates than secured loans.
Variable rate: An interest rate that changes when the official cash rate set by the RBA goes up or down. Changes in the variable interest rate on your loan change how much your monthly repayments cost.
According to 2015 research by Barclays Bank, Australia has the most household debt (mortgages, credit cards, personal loans, and overdrafts) of any country in the world.
A recent survey of almost 3,000 adults by Canstar Blue found that loan repayments were the biggest financial concern for 13% of respondents. Other main causes of financial stress were the cost of electricity (29%), and healthcare and medical payments (16%). In 2015, 37% of Aussies surveyed by Canstar Blue said dealing with money is stressful and overwhelming.
If you’re feeling stressed by the amount of your debt, don’t panic. It’s all about managing and paying off your debt, and there are many people who can help you.
First, you should talk to your lender and ask them about financial hardship repayment plans, with smaller monthly repayments or a lower interest rate.
If you don’t feel confident to talk to your lender on your own, you can contact a free debt management service such as Christians Against Poverty Australia, or Financial Counselling Australia, who will contact your lender with you and then help you create a budget and a repayment plan. You can call their helpline on 1300 227 000 or find a centre near you.
If your lender refuses to negotiate a financial hardship repayment plan with you, you should contact a free external dispute resolution scheme. Your lender will belong to one of these two schemes:
You can also get in touch with Financial Counselling Australia for free financial advice and counselling during this stressful time. You can contact any of the financial counsellors listed on their website. You can also phone their financial counselling hotline on 1800 007 007 for free from a landline, 9:30am to 4.30pm, Monday to Friday.
Finally, how can you pay off that debt? We’ve written about how to put all of your debt in one place and budget to pay it off with affordable monthly repayments on our personal loans page (see “Managing personal loan debt”). You can also use our Budget Planning Calculator to work out where all of your money is going – and where it should be going.
Do not fall for other businesses offering services to help you get out of debt, as some of them charge fees and are little more than debt consolidation companies. Always find out up front how much a debt company will charge you for their services – because you might be able to get the same help for free from a financial counsellor.
Every year, CANSTAR researches and gives star ratings to more than 150 car loans. The CANSTAR Car Loan Star Ratings are a sophisticated rating methodology unique to CANSTAR, which compare the dominant car loan products in Australia for an array of characteristics such as:
The results of our analysis is represented in our star ratings, with 5 stars indicating a product that offers outstanding value for consumers. Only the products that obtain a score in the top 5% to 10% of the score distribution receive a 5 star rating.
The personal loan providers we rate are listed on our car loan comparison website. The following list is current as at August 2016: