What is a car loan?
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 referred to as a vehicle loan. If you don’t have enough savings to afford to buy a car outright, but you can afford to repay a loan in monthly installments, you might consider using a car loan to finance your new set of wheels.
There are two main types of car loans:
- New car loans
- Used car loans
A car loan is sometimes referred to as a common type of personal loan. Personal loans as a category cover a much broader range of loans (e.g. debt consolidation, home improvement, study costs, weddings etc.), so we here at Canstar compare personal loan separately on our website.
Tips on applying for a car loan
1. Check your credit rating:
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 to ensure 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:
- Veda: com.au 1300 762 207
- Dun & Bradstreet: com.au 1300 734 806
- Experian: Experian Credit Services 1300 783 684
2. Have your paperwork ready to go:
Have your paperwork ready in order to make the process easier when you’re applying for a loan. A financial institution will generally want you to provide:
- Proof of income such as a payslip or tax return
- Proof of your current ongoing expenses such as rent/bills
- Copies of your current bank statements to show savings and repayments being made in the past on credit cards
- Personal identification such as a passport or driver’s license
3. Consider loan pre-approval:
What is loan pre-approval? Some people like to know whether they will be able to get a car loan before they start hunting around. 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 frame, usually around one to three months.
Don’t forget car insurance!
If you’re getting a car loan (and thus a car, don’t forget to insure it. At a minimum you need Compulsory Third Party (CTP) cover, but there are several other types of car insurance you can consider as well.
How car loan repayments work
Car loans are repaid with monthly repayments and have a defined “long term” – a timeframe in which the loan must be paid off. 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 the loan out early.
In contrast, the repayments for a variable car loan change whenever the lender changes their 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 payment shortens the life of the loan as well as the overall cost.
What if I can’t repay my loan?
Car loans, as previously mentioned, 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 usually reflected in a lower interest rate then an unsecured loan.
Most car loans for an older car are unsecured loans, where the lender agrees to lend you the money without any security and simply replies 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 are harder to get 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.
Compare car loans with Canstar
The most important thing to do before applying for a car loan is to compare all the different options available to you. Fortunately, Canstar compares over 250 different car loan policies and has done the hard work for you. Make applying for a car loan one less stress in an otherwise exciting time in your life.