Like home loans, car loans also come in different formats to suit a variety of borrowers in diverse situations. Whether you’re a cash-poor student just needing your own mode of transport, or an eager car enthusiast wanting the latest and greatest set of wheels to hit the market – some car loans are more suitable than others.
While car loans don’t come in as many variations as home loans, there are new or used car loans that can be taken out on a secured or unsecured basis at fixed or variable interest rates. Offering them are banks, credit unions, peer-to-peer lenders and car dealerships.
Type of Car
New car loans
New car loans are unavailable to be taken out for older cars – requiring the car to be either brand new or up to one, two or even three years old. This condition varies between lenders. Typically, a new car loan will be secured by the value of the car, and since new cars are generally worth more than older models, you might be able to negotiate a competitive interest rate.
Used car loans
Used car loans are for buying cars that are too old to qualify for a ‘new car loan’ according the lender’s standards. You’ll often find that these are for cars that are over two or three years old. But if the car is over five or six years old, it might also be too old to qualify as security for a ‘used car loan’, meaning you may have to apply for an unsecured loan 9which can attract a higher interest rate).
Is the Loan Secured By Assets?
Secured car loans
When a loan is secured by an asset, such as a car, the lender has the right to repossess and sell that asset when you fail to repay the loan. Loans that are secured have a lower average interest rate because they’re less risky for the lender. You’ll find that most new/used car loans are secured – the main idea is that the car is used as security. Of course, the car you’re buying might be too old to qualify as security (as we have mentioned above) in which case an unsecured car loan would be your next option.
Unsecured car loans
In effect, an unsecured car loan is no different from an unsecured personal loan in that the bank has no collateral on the money borrowed. The lender instead relies on the borrower’s creditworthiness. For this reason, an unsecured car loan would be harder to be approved for than a secured one, so people with poorer credit histories will have less chance of approval. Also, because they’re riskier for the lender, unsecured loans generally have higher interest rates.
What Sort of Rate Does the Car Loan Have?
Fixed rate car loans
Car loans are usually offered on a fixed interest rate for the life of the loan. This means repayments remain the same, so they’re easier to budget for. But there may be additional fees involved if you want to make extra repayments and pay out the loan early.
Variable rate car loans
A variable rate on a car loan is harder to come by than a fixed rate, but some lenders do still provide the option. As you would expect, the repayments for a variable car loan can fluctuate whenever the lender changes its interest rate. You’ll feel like a winner when they adjust their rates down, but you’ll be kicking yourself if they move them above what the fixed rate was offering.
Redraw facility/line of credit
If you’re a homeowner, you might be able to dip into your mortgage via a redraw facility or a separate line of credit to borrow to buy a car. The benefits of this include securing a typically lower interest rate as well as the convenience of having your repayments rolled into one. However, if you don’t make extra repayments to account for the extra debt, this could cost you more than an ordinary car loan. Car loans typically have a five to ten year term, so if you don’t pay back the redraw or line of credit within that time, you’ll pay more in interest over the long run.
Peer-to-Peer car loans
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. You can find out more on P2P lending here.
Car Dealership Financing
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 sometimes mark up the price of the car to account for the lower interest rates they’re offering. Also 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.
Important reminder regarding car loans
Remember that cars (aside from rare collectibles) are not an investment. Cars depreciate in value over time, so a financial advisor would often recommend you save for one if you can. But cars are an urgent necessity for people whose livelihoods and activities depend on them, so sometimes there’s just not enough time to save. In such a case, a car loan is appropriate.