Getting a car loan: A beginner’s guide to car loans
If you need your first car, an upgrade to accommodate a growing family, or if you just fancy a flashy new set of wheels, then one option for financing is to get a car loan.
This isn’t a decision you should just jump into; you need to find out more before you make any moves, as well as work out how to get the best deal for you.
What exactly is a car loan?
A car loan is a secured personal loan that’s used specifically to buy a vehicle, used or new. Just as with any other loan, you borrow an agreed sum of money from the lender and then repay it over a set term. Car loans involve interest, just like other loans, so you need to spend some time looking for comfortable rates first.
If you fail to keep up with loan repayments, the lender can repossess the security – the car.
Why use a car loan?
Getting a car finance deal does offer advantages over other lending solutions, such as credit cards. You’ll usually find better interest rates, as well as a finite repayment schedule. That makes managing a car loan easier and safer than a credit card, which is a line of credit so it’s easy to pay the balance down only to run it back up again.
You also own more of the vehicle with every payment; owning it outright at the end of the term.
Where you can find car loans from?
Lots of lending bodies offer car loans—banks, credit unions, peer–to–peer lenders and specialist lenders. Some lenders specialise in used car loans while others partner with particular manufacturers to offer loans on their cars only.
You can also approach dealerships for finance, too, but your best course of action is to consult a car loans comparison site before you start looking at cars.
One disadvantage of going through a dealership for either a new or used car loan is that sometimes dealers bump the price. The dealership uses its own lender to arrange your loan and it’s not unheard of for some to add a little extra to increase their profits. Pin down the price at the start if you’re going to go through a dealership.
How do you apply for car loans?
You’ll apply for a car loan in pretty much the same way as any other loan. You give the lender details of the car you’re looking to buy, as well as all your personal and financial information. This includes your income, assets, existing debts and so on so that the lender can assess your ability to make the repayments.
It’s also a good idea to look at your credit rating before you make any applications. If your rating is good to excellent, you’ll probably be able to ask for some of the lowest car loan rates on the market. If your rating isn’t so good, then maybe take some time to improve it or accept that you may not get the best car loan rate out there.
Have all your information handy
If you’re going through a lending body other than your own bank, you may need to provide the contact details of people who can verify the information on your application. These people include your employer, your landlord or mortgage provider, as well as previous credit providers and accountant. Your lender may contact them to make sure your information is accurate and that you’re a reliable borrower.
How long does it take?
The turnaround time for a car loan can vary. You can get a preliminary approval online in just a few minutes from many car loan providers.
It depends on how much you’re borrowing, whether the car is a common model and possibly whether you’re employed or self–employed.
As long as you deliver your information in good time and you’re looking at a regular sort of car, you can expect a definite answer within 48 hours or so.
It helps to get pre-approval from a lender
You can speed things up by having pre–approval for the loan from your lender. If you know you have, for example, $6,000 “waiting” for you because your bank is happy to extend this amount of credit to you then you have a much stronger negotiating position when you approach dealers.
Visiting showrooms, taking a shine to a particular car and then having to go through the applications mill, negotiating a few dollars down here and there and then applying for the loan is stressful. You might also find that dealers are prepared to compromise on the price if your finance is guaranteed. Don’t dawdle, though, as your pre–approval may only last for a month.
You may be able to make overpayments
Although you’ll initially agree to a set term for the loan, you may (or may not) have the option to make overpayments or additional payments to close it faster. It’s worth looking into this because each dollar you remove from the balance stops accruing interest, so not only do you pay the loan off quicker, you also pay less interest.
Many finance providers ask for a penalty fee if you pay the loan off earlier, as they were expecting to get more money from the interest, so make sure you know if you’ll pay one and how much it’ll be.
It’s essential to use a car loan calculator right from the start so you can find the deal that results in the easiest monthly repayments for you.
What sort of interest rates can you expect?
While the interest rates on car loans are lower than many credit cards, they can still vary quite widely. This is why you need to use a comparison site so you can see what’s on offer and what each loan entails.
Most car loans have 3, 5 or 7 year terms. For example, Bank Australia’s fixed rate car loan has a current rate of 6.45 per cent pa (comparison rate 6.66 per cent).
NRMA offers a fast loan with rates starting from 5.99 per cent, with a five–hour turnaround time for your application.
What you need to ask your lender
If you’re looking for a car loan, there are some important things you need to find out from your lenders before you proceed. These include:
- What your interest rate will be and how you can qualify for a lower one
- If there are any application fees or ongoing fees
- If you can get pre–approval and how long it lasts
- If you can make extra payments or pay the balance off early and how much any penalties may be, and
- How you check your balance.
Compare car loans from all of Australia’s major banks, credit unions and other lenders at InfoChoice.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.