Compare Car Loan Rates from 5.49%

What is a car loan?

A car loan is a personal loan taken out by people specifically to purchase a vehicle. You can take out a loan to buy both new and used cars.

Car loans can be anything from $1,000 to more than $1 million in some cases. Typically, loan terms last for up to seven years, although some lenders offer extended terms that can be up to ten years. The typical length for a car loan is anywhere from one to five years though.

Car loan interest payments are calculated like interest on any other loan. You take the interest rate (which will be changing if it is variable, constant if fixed) and multiply it by the outstanding amount owed on the loan on each day. You then divide this number by 365 to get the amount of interest due on each day. Interest is normally due at the end of each month, so you add together this figure for all the days in the month to get the interest amount due.

Interest payments go down as you pay off more of the principal loan amount, because the outstanding amount you owe decreases.

How to compare car loans?

There are several things you should be considering when you are comparing car loans. The first thing to remember is to always compare like for like products with one another. For example, compare secured car loans with other secured car loans.

You’ll also need to assess the following:

Interest rates

The interest rate will be the biggest factor in how much your monthly repayments are. Interest rates are generally lower for secured loans, and variable-rate loans. They can also vary based on the amount you are borrowing and the repayment time.

Many providers offer reduced rates for certain types of car. For example, if a lender has different loans available for green or electric cars, they will tend to have better rates. Another common distinction lenders make is between new and used cars (you will typically be charged more interest for older vehicles).

When you are choosing your next car, it’s worth keeping this in mind. An electric car may suddenly become much more viable when you consider the reduced interest.

Fixed v Variable rates

A fixed rate means that the interest you will pay is set at a certain rate for the duration of the loan. This makes it easier to budget as you know that the amount you repay each month will not change. You are also protected if, for example, the RBA raises the cash rate and interest rates go up. However, fixed-rate loans can also incur ‘break costs’ if you want to pay out a loan early or refinance. They also tend to have fewer features then variable loans.

Variable rates mean that the interest rate you pay can change at any time. With variable rates, your monthly repayments will fluctuate with wholesale interest rates, so there’s more unpredictability. You will also be impacted by cash rate hikes, although your rates can go down as well as up. Variable rates generally offer more flexibility with refinancing and extra features.

Term length

Choosing how long the loan you have chosen will go for is another important consideration. Naturally, a longer term loan will mean you repay less of the principal each month, so reduces your monthly repayments. However, longer loans also mean you end up paying more interest, as interest is calculated based on the monthly repayments rather than the overall loan amount.

A longer loan also means that your car will depreciate more while still under a finance arrangement. This usually means that you end up owing more money than the car is worth for an extended period. It also means you will have reduced equity if you decide to upgrade once again before the term of the loan is completed.

How does a car loan work?

A car loan is a formal finance arrangement, between three parties: the person buying the car, the person selling the car (referred to as a vendor), and the lender.

There are six steps involved in this process.

1. Search online and compare car loans. Find one that suits your needs.
2. Apply for the loan.
3. If approved, the lender will agree to lend you a specific amount to buy a vehicle.
4. A purchase agreement must be signed with the vendor
5. The lender pays the vendor on your behalf
6. You repay the lender, over the agreed period of time (almost always between one and ten years)

What different types of car loans are available?

There are a number of different ways to finance a car.

Secured or unsecured loans

Secured loans tend to result in bigger amounts and lower interest rates, as the lender has the security of whatever asset you used (often the car itself).

Unsecured loans mean that the bank can’t repossess any of your assets if you default, but usually results in higher interest rates.

A chattel mortgage is a specialist car loan for vehicles used for business.

Leases

Operating leases are more like a long term car rental as you don’t own the car at the end.

Another is a commercial hire purchase. This is an arrangement where the loan provider will take ownership of the equipment or vehicle being financed, and then hire it out to you through regular repayments. Once all payments have been made, ownership automatically transfers to you.

A car lease is similar to a commercial hire purchase, except you do not automatically take ownership once the agreement is completed. You can choose to return the vehicle or pay an additional amount to purchase it.

One popular option is a novated lease. This occurs when an employer pays for the lease of their employee’s car out of their before-tax salary. This can lower income tax payable.

What are the advantages of getting a car loan?

Save the cash upfront for other things

Rather than saving a certain amount per month until you have the lump sum you’ll need to buy up front, you can get a car loan, make these payments to your lender instead, and get the car straight away.

Access a better car

By spreading the cost of a car across several years of repayments, you will also probably be able to afford a more expensive, newer, safer or better-equipped vehicle.

Build credit history

By taking a car loan and making sure to make all your payments on time, you give lenders more evidence that you are a safe bet to lend money. This could help your chances of being approved for a bigger sum in the future, like a home loan.

What are the disadvantages of getting a car loan?

Interest costs

Interest costs mean you end up paying significantly more for a car than the drive away price you see on the dealership floor.

Late payment penalties

If you are late with your repayments, you may incur arrears fees or compounding interest.

Risk of losing your car

If you default on your repayments, your credit score will be affected, and if you used the car as security, the lender can take your car as collateral, meaning the lender can take it away.

How much can I borrow?

There are many things that influence your borrowing capacity. Lenders will assess your income, usual expenses, assets and any other ongoing debts you have (home loans or other personal loans, for example). Lenders will also check your credit history to see if you have defaulted on payments in the past. They are assessing the risk that you will not pay them back in the future, so if you have had loans in the past that you have missed payments on, they may choose to offer you less money or reject your application altogether.

A car loan can be secured using the car itself or another asset, often a term deposit. The loan is secured to the value of the asset used as security, and the lender can choose to sell this security if you default on payments. Secured loans are more likely to be approved and usually mean reduced interest rates.

How to apply for a car loan

Once you have a good idea of how much you are looking to borrow, and you have chosen the provider that suits you best, you can apply for most loans online. This process tends to be fairly straightforward, for a smooth and comfortable car loan application, you will need to provide your chosen lender with a range of documents that prove you’re a reliable borrower. These documents are:

1. Personal information and identification. This includes your full name, age, date of birth, citizenship information, and what dependents you have. Your drivers licence, passport, birth certificate and Medicare card are all examples of evidence you could provide here. Some lenders may also need to see a copy of your licence to verify that you are allowed to drive the car you are buying.
2. Proof of income. Your lender will need evidence of your capacity to pay the loan. You’ll need to provide bank statements and recent pay slips. If you are self employed, you may need to provide your two most recent tax returns to show your income.
3. Proof of assets and liabilities. Lenders may ask for proof of your assets and liabilities, like any other loans you may have.
   Information about your car and insurance. As some loans are dependent on the type and age of the car, you’ll need to provide the year, make and model. You’ll also need a dealer invoice or contract of sale, as well as information on the vehicles registration.
4. Check your credit score. It’s also a good idea to check your credit score before you apply to get a better idea of whether you are likely to be approved.

Personal information

When assessing your application, a lender will require the following:

• Your full name
• Your age
• Your date of birth
• Address
• Citizenship information
• List of dependents

To verify this information, they will need 100 points of ID (driver’s license, passport, Medicare card) and either a utility bill, council notice, tenancy agreement, or mortgage statement.

Proof of income

Once a lender has verified your identity, the next thing they’ll look at is your proof of income and employment - can you afford to repay the loan?

Depending on your employment status, a lender will ask for:

• Payslips - two most recent payslips
• Bank statements - for the last three months showing your incoming and outgoing expenses
• Tax returns or BAS - if you’re self-employed or own a business, you may need to supply this documentation. BAS stands for business activity statements.

A lender may also ask for a list of your current living expenses (e.g. rent or mortgage repayments), along with proof of genuine savings - this shows you have the ability to regularly save money and thus are likely to comfortably repay the loan.

Proof of assets and liabilities

To give a lender a broader view of your finances (your strengths and weaknesses), you may need to supply:

• Detail on any income-generating assets you may have e.g. savings, property, investments, stocks, etc.
• Information on an existing loans/debts e.g. mortgage, personal loan, credit cards, etc.
• A summary of your superannuation

Information about the vehicle

Lenders may ask for the details of the car you wish to buy so they can understand how much it will cost and in turn, how much you’ll need to borrow. This is usually more prevalent with secured car loans, in which the lender usually likes to lend against new or newer vehicles. You will generally need to supply the following information:

• An invoice from the dealership or contract of sale
• The year, make, and model of the car
• Vehicle chassis number
• Registration details
• Details on the car’s fuel efficiency (in the case of applying for any green car loan discounts)
• Confirmation of comprehensive car insurance

What car loan fees and expenses are there?

Car loans will have additional fees that you’ll need to pay on top of your interest and principal repayments. Some lenders charge application or establishment fees; one off charges for the cost of administrating the loan. There are also frequently arrears fees for missed payments and monthly service fees, among others. 

These will vary from lender to lender. A useful method to take these extra charges into account is to compare the comparison rate. As you will see from the comparison table above, the comparison rate is normally a few basis points above the interest rate. It incorporates all of these additional charges to work out a more accurate estimate of your out of pocket expenses. 

There are also expenses involved with any new car purchase. You’ll need to pay stamp duty for any change of ownership of a vehicle, as well as ongoing vehicle registration fees, insurance, and running and maintenance costs. Some of these may be covered under various car lease schemes. If you don’t currently own a vehicle, you’ll want to keep these expenses in mind when you are deciding how big a loan to apply for.

Features

There are all sorts of extra features providers may offer. Generally, more features are associated with higher fees, although this does vary.

Here are some of the most common additional features you may encounter:

• Extra repayments - Some loans will allow you to make extra repayments without any penalty fees, whereas others might penalise you. If you think that you are likely to have extra money at some point during the loans term, this is something to prioritise, as you may decide to make additional contributions to pay the loan off faster.
• Redraw facility - Some of the loans that allow extra repayments will also allow you to take out any additional funds above your minimum repayments.
• Pre-approval -  Some lenders will pre-approve you for a loan up to a certain amount, which gives you a better idea of how much you can spend on your new car.

How to get a low-interest rate car loan

There’s a few boxes you may want to tick to ensure you get a low-interest car loan, or at least one that’s competitive.

1. Have a new or newer car

Many lenders extend their lowest interest rates only to new or demo cars. Some might still offer competitive interest rates for used cars, say up to three years old, but interest rates tend to be higher for cars older than that.

2. Opt for secured rather than unsecured

A secured car loan means it is tied to the vehicle. If you default on repayments, your lender can take your vehicle away. Because of this ‘security’, the lender is able to lower your interest rate. Conversely, some loans are unsecured, meaning it’s not tied to an asset - this is riskier for the lender, and hence a higher interest rate likely applies.

The trade-off with a secured loan is that the lender usually likes your car to be new, demo, or lightly used. Classics or cars older than seven years may need to be financed with an unsecured loan.

3. Look beyond the advertised rate

Some lenders offer a low advertised rate, only to charge a lot of fees. This is reflected in the comparison rate, and a few hundred dollars here and there can really add up when you look at the overall car buying picture. In this instance, it could be worth looking at a slightly higher advertised rate where the comparison rate more closely matches.

4. Look at ways to pay it off early

One of the best ways to pay less interest is to make extra repayments on your car loan where possible. This can reduce the amount of interest payable over time and potentially reduce the length of your loan. Of course, you’ll want to find a loan that allows you to do this. Some lenders charge fees for early discharge, so you’ll have to weigh up if it’s worth it.

Other factors influencing your car loan rate

There’s a few extra things you can do or that you need to consider that can impact your interest rate.

1. Your credit history

This is less of a concern for secured car loans, but the interest rate on unsecured loans is more acutely affected by your credit score. Your credit history plays into how a lender assesses your ability to repay, however. Multiple missed payments and a lot of other debt can be red flags, and a lender might put you on a higher rate or refuse your application entirely.

2. If you’re self-employed

Self-employed people, especially new small businesses, might struggle to get low-interest car loans. This is because many of the top rates are for people on PAYE wages i.e. they’re employed by a big business. For small businesses to get a low-interest car loan they may have to present more than two years' worth of BAS (business activity statements). The alternative is a low-doc car loan, which can come with higher interest rates.

3. Having a deposit

While it may not lower the interest rate itself, coming into the car loan with a deposit can boost your credibility in the eyes of the lender, and also reduce the total amount of interest payable. That’s because you’re simply borrowing less money.

4. Features and flexibility

As mentioned earlier, car loans might offer features such as unlimited extra repayments as well as a redraw facility. While tempting, these might come with extra fees, which should form part of your overall interest rate and cost calculation. You’ll need to weigh up if these features are worth it - if you plan on paying more than the minimum repayment, they might be.