Compare car loans with redraw facility

Not every borrower approaches a car loan as a means to an end, or just another pesky monthly expense. There are features that some car loan issuers in Australia may offer that could help borrowers to get on top of their debt early and access cash when needed.

Car loans with a redraw facility are a popular option for borrowers who want to do just that. Let’s explore what this feature is, the benefits and drawbacks and whether it may suit your personal financial situation and goals.

A car loan redraw facility allows borrowers to “redraw” or access any additional funds they have paid into their car loan outside of the regular ongoing repayments. Just like a home loan redraw facility, it is similar to a bank account in that you may deposit funds and may be able to access them at a later date, depending on the lending criteria and eligibility requirements.

The ability to dip into funds deposited into the redraw facility when needed makes it a competitive feature to consider prioritising in your car loan comparison. For example, if you need to pay for mechanical repairs on the vehicle, or even if your energy bill was higher than expected, a redraw facility may offer financial relief.

Not every car loan lender will allow this feature, and often may penalise customers who try to make extra repayments. Some car loan lenders may also charge a fee for using the redraw facility, and it may also come with a minimum redraw cap. It’s worth reading the Product Disclosure Statement (PDS) and terms and conditions of the loan contract before applying.

It’s worth exploring the advantages and disadvantages of a redraw facility before proceeding.  

There are a few key benefits to having a redraw facility attached to your car loan, including:

• Access to funds – as mentioned earlier, being able to dip into the extra/early repayments you’ve made on your car loan may be beneficial, depending on your financial situation.
• Lower your loan repayments – Having a redraw facility means you can make extra repayments, and these flexible repayments are a competitive feature for some car loan borrowers. Making more than the minimum repayments on a car loan will help to reduce the principal owing on the loan. By doing so, you may lower your ongoing car loan repayments, as well as the overall interest charged over the life of the loan.
• Save more than a savings account – Interest rates on saving accounts are at record lows. This means that the interest you save on your car loan by putting extra funds into your redraw may be more than what you otherwise could have earned in your savings account.

On the flip side, there are some risks involved with adding a redraw facility to your car loan, including:

• Reducing your repayment discount - Keep in mind that by withdrawing any of the funds you deposit into your redraw facility, you may reduce the discount you’ve given yourself on your loan monthly repayments.
• Higher rates – Sometimes a car loan lender may charge you more in interest for accessing features on a car loan. Keep an eye out for the interest rate being charged for the privilege of a redraw facility.
• Fees and caps – Loan providers may also charge borrowers a fee for accessing the redraw facility and the redraw facility may also come with a minimum redraw limit. If you don’t want to be hindered in terms of how much you can access from your redraw, you may want to compare fee-free and cap-free options.

There is more to a car loan than the flexibility the lender can offer you. It’s crucial that the car loan and provider suit your financial needs and goals, and that you compare a range of loan features, rates, and fees before you consider applying. All of which may impact the overall cost of your car loan with a redraw facility.

Features to compare in a car loan:

• Interest rates – The interest rate charged on your car loan is arguably the biggest influence on the overall cost of the loan. Adding a redraw facility may mean the lender will charge you a higher rate for the privilege, so it’s worth looking at the comparison rate of the loan as well. The comparison rate factors in the upfront fees and ongoing charges, so comparing different comparison rates may help you to find the most competitive loan for your needs. 
• Fees and charges – Speaking of upfront fees and ongoing charges, there are a range of ways a car loan lender may charge you outside of your regular ongoing repayments. This includes establishment fees, monthly fees, extra repayment fees and more.
• Loan term – A car loan is generally between 1-5 years but may be longer depending on the lender. The length of the car loan may influence the overall cost, with shorter loan terms meaning higher repayments but less interest charged overall, and vice versa.
• Interest rate type – Generally, car loan providers offer features like a redraw facility to more variable rate car loans. Car loans with variable rates are subject to market fluctuation, meaning your interest rate could hike or drop during your loan term. A fixed rate car loan may offer more stability in your budgeting than a variable interest rate, but the lender may not offer as many features, like a redraw facility.
• Secured or unsecured loan – Car loans are either secured loans, in which the vehicle is used as collateral to secure on the loan, or unsecured loans, in which the vehicle isn’t secured to the loan and cannot be repossessed by the lender in the event of default. Secured car loans may come with lower interest rates due to the reduced risk on the lender from the vehicle being used as security.
• New or used car – A redraw facility may be available on both new car loans and used car loans, depending on the lender. However, the type of car you are seeking finance for may also influence the cost of the loan. New cars are generally more expensive than used cars, which means you may pay more interest over the life of the loan as the principal is higher. However, used car loans tend to come with higher interest rates on average, making new cars a potential low-rate car loan option.