How to get the best car loan deal

Many Australians want to update their vehicles, especially for those who depend on a vehicle to get to their job or for businesses needing work vehicles. It's not unusual to wonder where your funds will come from when you require a new or used car.

Getting a car loan can be the answer you're looking for. It can be daunting to begin taking these steps, with the uncertainty of what's involved and thoughts of whether you will be approved. This article can help put your mind at ease. It explains what is required to get the best car loan to suit you and your individual circumstances.

1. Do you understand your credit file?

The term 'credit file' can evoke fear when applying for a car loan. It is, in fact, a misunderstood term, and most people are unaware of how it is used to help obtain a loan. In its simplicity, your credit file details your history of debts and utility contracts and their repayments. It is available to loan providers as a reference to determine if you are a suitable candidate to lend money to.

If your credit file shows that you have consistently repaid loans and bills on time you will have a positive credit history and a high credit score. You have demonstrated that you are able and committed to making loan repayments. You will therefore be more likely to be approved for a car loan at a competitive rate.

If you have made late payments, had defaults or been bankrupt, these too will be detailed in your credit file. We have all made mistakes in the past and your financial mistakes stay on your credit file for up to 7 years before being removed. With a poor credit file, you will have limited lenders willing to provide a loan for you and those that do will charge higher interest rates due to the increased risk you present. You can improve your credit file by showing good money habits, that is, paying your debts on time, every time. This may mean having to pay a higher interest rate for your car loan now and then refinancing the car in a year or two at a lower rate, after showing good repayment history.

2. How does the loan term effect your repayment?

Most car loan terms vary from 1 to 7 years with 5 years being the most popular. As your loan term increases, your loan repayment decreases. And vice versa - having a smaller loan term means your repayments will be higher but for a shorter period of time. Making sure your repayment amount fits within your budget is imperative. You want to ensure your loan repayments are made on time, every time! A car loan calculator lets you see how changes to the interest rate, term and loan amount affects the loan repayments.

3. Can you make extra loan repayments?

Many lenders will allow you to make extra repayments without penalty. This allows you to choose to have a longer loan term, making sure your repayments are well within budget. And if you come into a windfall, get a decent tax return or are simply good at saving you can make extra repayments when you decide. These extra repayments reduce the amount of interest you will pay.

4. Watch out for hidden account keeping fees!

When you get a quote for a car loan make sure you get all the facts. Some lenders have no extra fees, and the interest rate and repayment amount are exactly as quoted. However, some lenders have a monthly account keeping fee. With this extra fee your repayment goes up and effectively the interest rate increases too. This is where comparison rates come in handy. A comparison rate includes all fees and charges and gives you the actual out of pocket loan repayment and calculates the comparable interest rate based on this total repayment.

5. Should you pay a deposit?

Some lenders will require a deposit, and some won’t. Providing a deposit reduces the amount borrowed and the loan repayments. However, having some cash on hand for a raining day is good practice. With interest rates at all-time lows, keeping your deposit as cash on hand and making an extra loan repayment later when you have more savings makes financial sense.

6. Are you going to use the vehicle for business?

Business loans attract competitive interest rates and the GST on the purchase price as well as the interest repayments are tax deductible. If you can justify 50% business related use for your new vehicle purchase and have an ABN, then a business car loan will be your best option. Another benefit of business car loans is that no doc and low doc car loan options avoid the paperwork and red tape that can often affect business lending. With fewer hoops to jump through, loans of this types are ideal if you don’t have the necessary documentation to prove income, such as up to date tax returns. This makes low doc car loans are a popular choice amongst small business owners.

7. Can you include a balloon payment?

Balloon payments are one off lump sum payments due at the end of the loan term. They are usually 20% to 50% of the car loan amount. Effectively a balloon payment reduces the regular loan repayments during the life of the loan. Balloon payments are often used when buying a new business vehicle with the intention of upgrading the car every 5 to 7 years. Once the loan term has finished the car is sold, proceeds pay out the balloon lump sum and a new car is financed. The business can write off the GST on the purchase price of the new car purchase and claim interest payments on the loan all while paying a minimum monthly loan repayment.

8. Are you buying a new or used car?

New cars attract competitive interest rates as well. When buying used, most lenders do not want the vehicle to be older than 12 years at the end of the loan term. For example, if you want a 5 year loan term then the oldest vehicle you can buy will be 7 years old. If you want an older car, perhaps to restore or recapture your youth, then a personal car loan will be your only option. Do be aware that personal car loans do have higher interest rates.

9. Do you want a green car?

There is currently a discount on interest rates for electric and hybrid cars. This is part of a government initiative to encourage green car purchases to reduce emissions. Often you will receive a discount of over 0.5%.

10. Finance – dealership vs bank vs broker?

There are hundreds of lenders within Australia that offer car loans. In the current covid environment lending criteria can change daily. Trying to navigate this plethora of lenders and work out the best loan option to suit you can be quite confusing without professional assistance.

We recommend securing the services of an experienced finance broker. Brokers are accredited professionals who have access to a large range of lenders, including banks. They have a wealth of knowledge and experience about car loans and can help choose what will work best for you. Regardless of your credit file, whether you're looking for a vehicle for personal use, for your small or new business, or a company that brings in millions of dollars, using the expertise of finance brokers will ensure you get the best loan.

It's as simple as this: if you have a water leak you call a plumber, if your sick you go to a doctor and if you need a loan, you see a finance broker. Go to the experts whose days are spent getting the best car loans for their clients. Brokers work for you, and they thoroughly research each option to get the best car loan for you.

Dealership finance managers do not have to have any finance accreditations and usually have one, maybe two lenders to choose from. Your circumstances may not fit this lender, but the dealership will apply on your behalf regardless. You could end up with a much higher interest rate or loan terms that don’t suit. An even worse outcome could be having your loan application declined, which is then listed on your credit file reducing your credit score.

Banks also have access to only their car loan options. Again, you may not fit their criteria, or you may simply end up with a much higher interest rate then you deserve.

11. Get pre-approved before walking into a dealership!

We all know that car salesmen are extremely good at sales! Do your research and get a pre-approved loan before getting the hard sell. You can then compare interest rates and loan repayments to keep the dealership honest.

Whatever your circumstances, there are plenty of options available to secure a loan that works for you. Speaking to a financial specialist is the best way to move forward.