1. Decide on the type of car
The type of vehicle you choose will directly affect your budget and how much you'll need to borrow. Before you apply for a car loan, confirm whether you’re in the market for a new or used vehicle.
A new car will (naturally) cost more than a used car, so you may need to borrow more to finance the purchase. Used cars are more affordable but may have hidden problems that will require repairs down the line. Both new and used cars will come with pros and cons that you should weigh up before applying for the loan.
2. Secured vs unsecured loans
Car loans are available in two main options - secured and unsecured. With a secured loan, an asset you own is used as collateral for the loan (usually the car you intend to buy). If you can’t make repayments on a secured loan, the lender can repossess the asset to recover the loss on the outstanding loan amount. The upside of a secured loan is that it has lower interest rates, since the risk is lower for lenders.
An unsecured car loan does not involve the use of any collateral, meaning that there’s no risk of losing personal assets for borrowers. However, this increases the risk for lenders, resulting in higher interest rates.
If you plan to use the purchased car as collateral to access lower interest rates, keep in mind that secured loans are typically available only for new cars. Lenders seldom accept used car purchases as security due to the vehicle's lower value.
3. Understand the costs involved
Taking on a motor vehicle loan may come with several additional payments on top of regular repayments. Being aware of the fees involved with your loan will help to budget more accurately.
- Setup fees - Lenders may charge a one-time fee for the administrative cost of setting up the loan.
- Monthly fees - Some lenders charge a small monthly fee for the management of the loan.
- Late payment fees - Missing a repayment will result in a late payment fee that adds to the cost of the loan.
- Early repayment fees - Choosing to repay the loan before the loan term will incur early repayment fees that account for the loss in interest earned for the lender.
- Balloon payments - A balloon payment is an option offered on some loans where borrowers make a lump sum payment at the end of the loan term. Balloon payments are used to reduce repayment amounts early on in exchange for settling a large portion of the loan at the end.
4. Balance interest rates and loan terms
Borrowers often look for a motor vehicle loan with the lowest interest rate - while this is an ideal approach to minimise the cost of interest for the loan, it may not always be the best approach depending on your financial circumstances and needs.
Motor vehicle loans with low interest rates typically have extended loan terms to offset the lender’s profit margin. On the other hand, a car loan with a higher interest rate might come with a shorter loan term. The key to getting the best motor vehicle loan for your needs is to find a balance between interest rates, the length of the loan, and the size of the repayments.
5. Consider obtaining pre-approval
Pre-approval refers to a conditional acceptance offer provided by a lender. In simple terms, it means that the lender has agreed to lend you the specified amount of funds based on the information you’ve provided in the application.
The biggest benefit of obtaining pre-approval is that it allows borrowers to start shopping for a motor vehicle knowing that the lender is already willing to provide the funds. Pre-approval also provides borrowers with greater leverage when negotiating the vehicle price with dealerships or private sellers. Sellers may be more willing to offer a better deal to someone who already has the funds to make the purchase.
6. Work with a loan broker instead of the dealership
When you’re ready to apply for a motor vehicle loan, consider working with a loan broker instead of approaching lenders directly or taking a loan from the dealership. Making individual applications to one lender after another is time-consuming, and loans offered by car dealerships usually have less favourable rates and terms.
A loan broker will work on your behalf to search and compare loans from multiple lenders at a time to find one that perfectly meets your borrowing needs. This saves time and money, and makes the process of applying for a motor vehicle loan much easier.
Find a local motor vehicle loan broker from our list of approved loan brokers across Australia to get a car loan with the best rates and terms for your financial circumstances.
