How to choose a car loan

The best car loan for you may not always be obvious. Car loans from different providers may better suit some households than others by fulfilling different needs. When choosing a car loan, it’s important to compare a variety of different options so you can be confident that you’re getting the best value for your money.

How much would you like to borrow? 

The more you borrow for a car loan, the more the repayments may cost. Using a car loan calculator can help to give you a better idea of the car loan repayments you may be able to fit into your household budget.

How long would you like to take to repay the car loan? 

A shorter loan term may cost more from month to month, but you’ll pay off your car sooner and may pay less in total interest charges. Choosing a longer loan term could mean more affordable repayments, though you may pay more in total interest on your car.

Do you want a fixed or variable interest rate? 

Car loans with fixed interest rates may be relatively simple to budget for, as your regular repayments will be the same for the duration of the loan term. A car loan with a variable interest rate may see your repayments rise or fall with your lender’s interest rate, though you may also be able to benefit from extra features and benefits that not all fixed rate car loans may offer.

How’s your credit score? 

Your credit score is a summary of your financial history. If you’ve borrowed and repaid loans or credit cards in the past, you’re more likely to have a good credit score. But if you’ve previously defaulted on repayments or have a bankruptcy in your credit history, you’re more likely to have poor credit.

Lenders generally offer the lowest car loan interest rates to customers with the highest credit scores, provided they also fulfil the other eligibility requirements. Poor credit borrowers are more likely to pay higher interest rates, or may need to secure their car loan with the value of their vehicle.

You can check your credit score for free to  get a better idea of which car loans you’re most likely to be eligible for.

Do you want a secured or unsecured car loan? 

A secured car loan uses the value of the car you’re buying as collateral – if you default on your repayments, you could lose the car. You may pay a lower interest rate for a secured car loan, but you may be limited in the type of car you can buy, as it will need to have enough value to secure the loan. For example, you may need to buy a more expensive new car, or a used car under a certain age limit.

Unsecured car loans don’t require security, so they could be used to purchase almost any type of vehicle, which you won’t automatically lose if you default on your repayments. However, they also often have higher interest rates, and the lender will still take legal action against you if you default on your unsecured car loan.

What are the fees and charges? 

Some car loans have low interest rates but charge high upfront and ongoing fees. In some cases, these loans could actually cost more than a car loan with a higher interest rate and low or no fees.

A car loan’s comparison rate combines the cost of interest with its standard fees and charges, which can give you a better idea of the overall cost. It’s still worth checking if there are any extra fees or charges that aren’t included in the comparison rate.

What extra car loan features and benefits would you like? 

Some lenders offer features and benefits that can add extra value to a car loan, though you may pay higher interest rates or fees.

These may include:

• Extra repayments: The faster you pay off your car loan, the less interest you may pay on the vehicle in total.
• Fee-free early exit: Some lenders charge a fee if you pay off your car loan ahead of schedule, while others let you exit the loan early and save on interest.
• Repayment frequency: Do you want to make monthly, fortnightly, or weekly repayments? Different repayment structures may better suit different household budgets, and making repayments more often may help to save a little money in interest over the long term.
• Balloon payment: This is where you only pay off part of the car’s value over the agreed loan term, and leave the rest to be paid as a lump sum (the “balloon”) at the end of the loan. Alternatively, you could consider refinancing the loan to pay off the balloon over time, or even upgrade to a different car.
• Adding extras to the loan: Some lenders will let you roll extra car expenses such as registration and taxes into your car loan. While this may help to save you some money upfront, keep in mind that you’ll need to pay interest on the extra money you’ve borrowed, which could cost you more over time.

Compare car loans in Australia