Everyone wants to own a car, but not everyone has enough savings to pay for it upfront. That is why many people in Australia opt for car loans in order to get their dream car. There are many car loan options available in the country, each with its own set of characteristics, pros and cons, and terms and conditions.
In principle, car loans share almost all of the characteristics of a personal loan. The only difference between the two types of debt is the type of asset used to securitize the debt. While personal loans require the borrower to pledge an existing asset as collateral, car loans consider the car as collateral for the loan.
Since the value of the loan is closely linked with the value of the collateral, lenders assume a much smaller risk compared to personal loan providers, and hence car loans carry a much smaller interest rate of around 5% to 10% per year. In case the borrower does not wish to pledge the car as collateral, then they should subscribe to an unsecured personal loan to purchase the vehicle, although this may come with a much higher interest rate of around 15-20% per year.
Car loans vary in value, but most offer loans between $1,000-$100,000 for a term period of up to 7 years.
Tip: Lenders consider a variety of factors before approving the loan amount and repayment period, such as the condition of the car, it’s worth, and the borrower’s ability to repay the loan. Use a loan provider like Viva Paydays to evaluate your chances of getting approved for a loan.
Finding The Most Suitable Car Loan
There are three factors that one must consider before subscribing to a car loan: whether the car loan is sufficient to allow the purchase of the desired car, whether it comes with affordable repayment commitments, and whether all other features of the loan are suitable and acceptable.
The following checklist can help in narrowing down car loan options and in selecting the most suitable car loan:
- Cost of the loan
Car loan providers usually have a combination of charges on their loans, including an interest rate and a combination of other fees. The interest rate is fairly standardized and hence easy to compare among different loan options. However, the fees applied in addition to interest charges vary by lender, and hence it is important to use the comparison rate when comparing multiple car loan options. This comparison rate includes both the interest rate and any other charges applied by the lender.
- The flexibility of the repayments
Having the ability to repay a loan before the end of its stipulated loan term, without incurring any additional charges, is a great benefit to have as it can help borrowers reduce the total interest they must pay on a loan.
- The loan term
When it comes to car loans, lenders are very flexible as far as the loan term is concerned. The term can be as short as 1 year or as long as 7 years, in most cases. The longer the loan term, the higher would be the interest and charges accrued on the loan. It is important to select a loan term that is not only affordable but also minimizes the cost of the loan.
- Eligibility of the car
Not all vehicles are eligible to be purchased with every car loan, as each lender has its own criteria for acceptable cars. This criterion must be met before the borrowed funds are used to buy the car. Enquiring from the lender about a car’s eligibility before securing a loan is the best approach.
- Borrowing limit
The borrowing limit approved by the lender is based on multiple factors, most dominantly the value of the vehicle itself. A lender will not approve a loan amount that exceeds the car’s value. Also, the borrower’s credit rating and affordability assessment will also determine the loan amount that is eventually approved.
Tips On Securing A Great Car Loan
The following tips can help borrowers secure a better car loan.
- Get a relatively new vehicle
Since the car is used as collateral, the condition of the car determines the risk taken on by the lender. A new car carries lower risk compared to a used one, hence lenders are likely to charge lower rates on cars that are new, although cars that are as much as two years old also qualify as new for many lenders.
- Ask for quotes that don’t require credit checks
Getting multiple loan quotations is a great way to find the best loan option. However, some lenders conduct hard credit checks to complete a quote inquiry, and these have the potential of damaging the credit history of the borrower. Hence, such inquiries should be avoided as much as possible.
- Highlight complete financial position
Providing complete information about personal finances can convince lenders to offer cheaper rates on a loan, provided the borrower is in a strong financial condition.
- Aim for a good down payment
Many lenders are willing to offer lower interest rates on their car loans if the borrower is willing to give a large down payment at the beginning of the loan.
Pros and Cons of Getting A Car Loan
The following pros pertain to car loans:
- Availability of many lenders in the market
Borrowers are able to find affordable car loans due to high competition in the car loan industry. Also, each lender has a unique service offering, making it easier for borrowers to find the right match for their needs.
- Easy eligibility criteria
Car loans are easier to secure compared to most other types of loans. Even those borrowers that have a poor credit rating or those who supplement their income with payments from Centrelink are likely to be eligible for a car loan.
- Rates are fixed
Car loans come with predefined rates that are established at the beginning of the loan, allowing borrowers to budget repayments very easily.
The following cons are associated with car loans:
- Restricted use of loan amount
An approved car loan can only be used for a specific purpose and not for any other purposes. Many lenders also restrict the use of funds to the purchase of the particular car model that had been specified by the borrower in the loan application.
- Variable car loans can have uncertain repayments
A few car loan providers offer variable rates as well, which can make it difficult to budget repayments of the loan over the years.
Documents Required To Apply For A Car Loan
The following information must be submitted to apply for a car loan, in the case of most lenders:
- A valid Australian ID
- Detailed financial information, including the source of income, expenses, assets, and other outstanding loans.
- Information about the car that the borrower wishes to purchase with the loan amount.
How much can be borrowed as a car loan?
Car loan providers consider two main factors while approving a loan amount: the price of the car to be bought, and the borrower’s affordability. In most cases, lenders provide loans up to the value of the car.
How fast do car loan providers give approval on a loan?
Lenders usually approve a car loan in a matter of hours, provided all conditions have been met and the required information has been received.
Can insurance and on-road costs be included as part of the car loan?
Including such costs may be allowed by some lenders, although it is wise to check as some lenders may approve the inclusion of these costs in only some cases.
Does the car need to be purchased through a dealer or can I buy one privately?
Borrowers have the liberty to select the car of their choice. The car’s information, including its ID number (VIN) and registration number, needs to be given to the lender so that the loan application may be processed.