What is a car loan?
Car loans are simply secured personal loans that are used solely for the purpose of buying a new or used car. Consumers borrow a specific amount of money they need then repay the debt with interest in equal payments over an agreed term.
Why use car loans?
Car loans offer the general advantages of being cheaper than the closest alternative form of lending (credit cards) and providing the discipline of a repayment schedule. This means you pay the car off in set regular payments as you drive – steering you towards actually owning your set of wheels at the end of the loan term.
Where can you get a car loan?
Car loans can be sourced from many different types of lenders: banks, building societies, credit unions and other finance companies, as well as P2P lenders. You can even get a car loan from the finance arm of major car manufacturers.
It is usually a good idea however to shop around and compare car loans before you start shopping around for the car. If you decide to finance your car purchase at the car dealership, make sure you agree on the car price before you start negotiating on the loan. Be wary that dealers sometimes mark up the price of the car in order to offer a lower interest rate than the big banks.
What is the process for applying for a car loan?
When applying for a car loan you’ll have to provide details about the car you’re buying, proof of identity and of your ability to make repayments to your possible lender. This means you’ll need to inform them about your income, assets, liabilities (credit cards and any other loans you have), and your general ability to make repayments.
Lenders need to check if what you’re saying is true (there are a lot of sneaky people out there!) so you’ll have to provide contact details of people and organisations that can verify your information, such as your employer, accountant, past finance lenders, or landlord/property manager. The lender may then make calls to these contacts and check your credit history to see if you’re worthy for approval.
The time it takes to get approved can depend on a variety of factors, such as whether it is a rare or everyday car you are borrowing for. For a straightforward loan on an everyday car it shouldn’t be more than 48 hours, provided the lender receives all of the information it requires from you in a timely manner.
What is loan pre-approval?
Loan pre-approval means getting approved for a loan (but not actually receiving the money yet) before finding a car. Some people like to know whether they’re able to get a car loan before they start car-hunting, because they want to know how much they can spend and not have to worry about having the price of the vehicle negotiated along with the terms of their loan. In contrast, the normal process of looking around for cars, getting the price, and seeking out loans based on those numbers can be more stressful.
Pre-approval is only valid for a limited time – generally 1 to 3 months.
Can I make extra repayments?
Car loans have a set repayment schedule. Many car loans, however, allow the borrower to make extra repayments to pay off the debt faster. Every dollar you repay above the required repayment shortens the life of your loan as well as the overall cost, because you end up paying less in interest. It’s vital to note, however, that some car loans and personal loans charge a penalty fee for paying off the loan earlier than the specified due date – so always ask your lender.
Use our Car Loan Repayment Calculator to work out what it will cost to repay your loan at different loan terms and interest rates.
What about interest rates?
The interest rate on car loans varies significantly between different lenders, which is why you should compare car loans to find the best offer. On Canstar’s database as of October 2016, car loan interest rates for a typical 5-year, $20,000 loan in NSW vary from a minimum of 4.69% p.a. to a maximum of 15.99% p.a. (comparison rates range from 5.24% p.a. to 16.29% p.a.). Like a mortgage, car loans offer a choice between fixed and variable rates.
Questions to ask your lender
If you do decide that a car loan is suitable for you, here are some questions you should be asking when looking to find the best lender:
- What is the interest rate?
- How can I qualify for a lower rate?
- Are there any application or ongoing fees?
- Is the interest rate fixed or variable?
- Can I get pre-approval for the loan?
- How long does pre-approval last?
- Can I make extra repayments or lump sum repayments?
- Is there a penalty for paying off the loan early?
- How can I check how much I have owing?
- How can I make my repayments?
The other thing you should definitely do if you decide that a car loan’s the way to go, is to use CANSTAR’s comparison page to find the perfect car loan for you.