What to consider with a low-interest rate car loan

Before you apply for the cheapest car loan you can find, there’s a few things to weigh up.

1. Fees

Lenders might offer an attractive advertised rate, but charge a lot of fees. Common fees include an establishment fee, early-exit fee, regular monthly fees, and exit fees. A good indication of a product with high fees is if the comparison rate is much higher than the advertised rate.

In this instance, it could be worth picking a higher advertised rate with fewer fees. You’ll have to do the maths with regards to your own purchase here.

2. Flexibility

Many low-interest car loans also come with flexible features such as unlimited extra repayments, and a redraw facility. Making extra repayments where possible can significantly reduce the length of the loan and reduce the overall interest payable. A redraw facility also allows you to put extra money in, which can reduce interest payable, and if you need it, withdraw the cash again.

Of course, these features usually don’t come free, and the loan might attract fees for these perks as mentioned earlier.

3. Term length

Many car loan products, especially those offered through a dealership, express the loan in repayment terms only. For example ‘Buy from $50 a week!’ - but you don’t actually know the interest rate or the essential facts until you scratch beneath the surface.

Car loans are often offered anywhere from one to seven years, with three to five years being most common. A shorter loan term results in a higher regular repayment, but lower overall interest paid, and vice versa.

While not strictly to do with a low interest rate, be aware that overall interest payable is heavily contingent on your loan term. Many motorists pick a suitable blend of interest payable and a regular repayment they can fit into the budget.

4. Age of car

The age of the vehicle you wish to purchase can influence your interest rate. Many lenders offer the most competitive interest rates on new or demo vehicles. Used vehicles often attract higher interest rates. This is because there is more risk for the lender in the event you write the car off. Cars tend to depreciate quickly, and used cars aren’t worth much - if you write it off or default on your payments, there might be a higher chance the lender can’t recoup their costs from the sale of the vehicle.

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

As mentioned before, 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.