Things to Consider When Comparing Car Loans
‘Shopping around’ and ‘Doing your homework’ are no-brainers when making any big (or small) purchase in life. But you may be missing the fine print if you focus entirely on interest rates. Here are some things to consider when comparing car loans…
Firstly, the two biggies…
Car loans from dealerships and car loans from lenders.
Car Loans From Dealerships
These are from dealerships. They’ll want you to use their finance for a few reasons; maximising their profits and commission for whichever salesperson actually sells you the car. Often dealers advertise zero percent interest loans to get people into the showroom.
Here’s how 0% loans work: they almost sound too good to be true – and often that’s the case. Dealerships tie these loans to specific makes and models and based them on the maximum price of the car. For example, if someone pays cash, the car may cost $19,990 but with a ‘zero percent’ deal, it may be bumped up to a non-negotiable $24,990. They can often attract other fees like delivery or admin costs. You won’t get ‘something for nothing’.
Car Loans From Lenders
These are the more traditional car loans. You borrow money from a bank or financial institution, buy the car and pay the lender back. Typically, they have interest rates of around 8-12% but bear in mind – 8% on a $19,990 car still ends up being cheaper than a ‘zero percent’ interest rate on a $24,990 car.
You’ll also have the option to buy a car from a private seller – think Gumtree or CarSales. Comparing car loans from multiple lenders is always a good idea (shop around!) – this is where a broker can work their magic. Brokers are able to find the best loan to suit your situation without leaving enquiries on credit files.
The actual repayments, fees and total amount paid at the end of a loan are the questions to first ask and answer when you compare car loans.
So what else is there to consider when comparing car loans?
Quite a lot actually – here are some of the most important…
New or used?
This comes down to budget and personal preference. A new car will have a cheaper interest rate as the car will be under warranty and therefore have less risks attached. This is where the ‘zero percent’ loans come in too. Of course, a used car will be cheaper (depending on model) and you’ll be able to negotiate a little easier. Make sure to hire a professional to thoroughly inspect a used vehicle too.
A co-signer is someone who agrees to pay the loan back if the original borrower can’t or won’t pay. They are considered a safety net for both the lender and borrower. Co-signers are often people with stable income and high credit scores. Bringing a co-signer on to your loan can significantly reduce interest rates. Commonly, they are parents helping first-time borrowers.
Interest rates and comparison rates
If you’re doing your homework (reading this article is a good start), you’ve probably seen comparison rates. Likely appearing next to interest rates, the comparison rate is the interest rate PLUS all fees and charges – so they’re of course higher. If there’s a large gap between the interest rate and the comparison rate, there are a lot of fees.
This is when the loan is ‘secured’ to the vehicle being purchased. In other words, if the borrower doesn’t pay back the loan, the lender can take the car as collateral. They are very common and reduce interest rates as there is less risk attached. The other option is a personal loan to buy the car. This is most common on low-volume or grey imports when lenders won’t accept the car as collateral or lend against a particular model. Make sure to select the correct loan type when comparing car loans.
Naturally, all lenders want more money and less risk. Down payments are a sum of money paid upfront for the car. They reduce the amount of interest paid as the total loan amount decreases. Remember, you pay interest on the amount of money owing – you buy a $20,000 car, you owe interest on $20,000. Pay a $4,000 down payment for example, you owe interest on $16,000 – the percentage may be the same but the dollar amount will be less.
- PPSR: (Personal Property Security Register). An official document common for car loans. It shows information such as if the vehicle has been stolen, written off or still has money owing on it.
- Application Fee: Payable to the lender. This is for the lender’s time to organise the loan. Prepare documents, analyse data and check documents for example.
- Establishment / Origination Fee: This fee payable to a broker or third party.
- Risk Fee: An additional fee from a lender if the loan is particularly risky.
- Monthly Fee: Like an account keeping fee, similar to what banks may charge you each month for your bank account. A $12 monthly fee is over $1000 total for a 7-year loan!
At the end of the day…
Doing your homework will save you money. As you can see, there are a lot of things to consider when comparing car loans. If you don’t have time to go over all the intricate fine print of a loan contract – talk to your broker or lender. They are responsible for making loans clear to the customer – you. If you’re struggling with high interest rates due to poor credit or a new job, keep looking at all the options out there.
A good way to get started is with a loan calculator. These online tools are designed to give users an idea of what repayments might look like.