Aside from purchasing a home, the family car is probably the biggest single purchase most households will ever make. It also has to work harder than almost anything else you own, from the school run to weekend sport. However, while some families are lucky enough to have saved sufficient funds to pay for it outright, the overwhelming majority won’t be able to secure the vehicle they need without finance.
Thankfully, there are now more options than ever to do this, though the process still presents some challenges. Not least because each lender offers options with different rates, fees, repayment terms and conditions. Many of which can seem similar at first glance.
That said, they also all have small differences that can add up over the life of the loan. So, if you’re planning to apply for finance to buy a new or used vehicle, it’s worth taking the time to compare alternatives.
Doing this can save money and help you find a loan that suits your circumstances. So, with that in mind, let’s take a look at the best way to compare personal car loan options. The examples below are framed around the Australian market, though the way you weigh one loan against another works much the same wherever you live.
What Types of Personal Car Loan Options Are Available?
When you start to research car loan options, one of the first things you’ll notice is that there are plenty available from banks, online lenders, and other financial institutions. Generally, though, they fall into two categories: Secured and unsecured loans.
The main difference between the two is that a “secured” loan uses the vehicle as security for the loan. An “unsecured loan” does not. As a result, interest rates for secured loans tend to be lower because the lender has an asset linked to the loan. They also usually allow borrowers to access larger loan amounts and longer repayment periods.
Because an unsecured car loan does not require the vehicle to be used as collateral, lender approval is generally based on your income, credit history, and financial situation. That said, they can provide you with a bit more flexibility than secured loans.
How Can You Compare Car Loan Interest Rates Effectively?
Interest rates are among the first things people consider when comparing vehicle finance options. However, while a lower rate usually translates to lower borrowing costs, it should not be the only factor you consider. Indeed, two loans that advertise the same rate can yield very different outcomes for your household once fees and charges are factored in.
When comparing lenders, it is essential to look at both the interest rate and the comparison rate. Doing this will give you a fuller appreciation of what the loan may cost you over time.
It is also worth checking whether the rate is fixed or variable, as this can affect the future amount of your repayments.
How Does the Loan Term Affect Your Repayments?
The loan term refers to the length of time you have to repay the loan. Typically, car loans range from 1 to 7 years, with 5 years being the norm.
As a general rule, the longer the loan term, the lower the monthly repayments you will be required to make. This is simply because the debt is spread across more years. However, the downside is that you may end up paying more interest overall.
By contrast, a shorter term often means higher monthly repayments. But it can reduce the total cost of borrowing. For instance, extending a five-year loan to seven years may result in lower monthly payments. Yet, the additional interest accrued over those years can require you to pay significantly more than you would otherwise overall.
When choosing a loan agreement, it is wise to find one that offers the right balance between what your household can comfortably afford each month and the total cost.
What Should You Know About Fixed and Variable Interest Rates?
Regardless of whether they are secured or unsecured, all car loans come with either a fixed or a variable interest rate.
At a fixed rate, your repayments remain the same throughout the agreed loan term. The benefit to you is that they remain predictable, which makes household budgeting easier when you are already keeping track of everything from groceries to kids’ chores and pocket money.
A variable interest rate, on the other hand, can rise or fall depending on both market conditions and lender decisions. This is essentially a bit of a gamble, as it may mean you have to make lower repayments if the rate decreases. Or more, should they rise.
Whether you choose a fixed or variable rate is up to you. Some borrowers prefer the certainty of fixed repayments, while others are comfortable with the flexibility of a variable rate. Either way, it is a decision worth making together, in the same spirit as the other habits you build with your partner, because it will shape your household budget for years. Before choosing either option, it is wise to think about your budget and how much change or uncertainty you are willing to accept over the life of the loan.
How Can You Estimate Your Car Loan Repayments?
If you want to know how much you will likely pay for your repayments, most lenders offer a car loan calculator on their website. This can be useful in providing you with a fairly accurate estimate because they allow you to enter the:
- Loan amount
- Interest rate
- Loan term
- Repayment frequency
Using their calculator can give you a better understanding of how changes to the loan amount or term will affect monthly repayments. This can be particularly useful if applying for a variable loan.
What Documents Do You Need When Applying for a Car Loan?
When applying for a car loan, most lenders will require you to provide them with a range of supporting documents during the application process.
These may include:
- Proof of identity
- Recent payslips
- Bank statements
- Employment details
- Information about the vehicle purchase
It is wise to ensure these documents are valid and ready to go to reduce delays and speed up the finance approval process.
How Can You Improve Your Chances of Car Loan Approval?
After receiving your application, lenders will look at several factors to determine your suitability. They include your credit history, any existing debt and whether you have a stable income.
It is also worth checking your credit report before applying and taking steps to increase your score if it is low. Additionally, try to reduce your existing debt as much as possible and regularly set aside some money in a contingency fund. This will improve your chances of gaining approval.
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