A ‘How To’ Guide to Car Loan Comparison
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A ‘How To’ Guide to Car Loan Comparison

Georgia Matthews

Georgia Matthews

26/03/2021 • 10 minute read

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A car is generally a person’s most expensive purchase during their lifetime, second only to property. For this reason, purchasing a car is extremely important and you’ll want to do your research. If you’re looking for a guide to learn all about car loan comparison, then you’ve come to the write place. We can teach you about security, interest rates, loan terms, and more. Once you’ve got an idea of all the features of a car loan, you’ll be able to effectively compare loans to get the best deal for you.  

What is a car loan?

Put simply, car loans are akin to personal loans and are used to purchase a vehicle. Car loans come in a variety of forms with different features. If you’re looking to take out a car loan, it’s smart to do your research to determine what features you are looking for. This will ensure you are able to properly conduct a car loan comparison.

How to do a car loan comparison

It sounds like a big task, but we’re here to help you compare car loans so that you can find the best deal for you. There are many features of a car loan to consider in your car loan comparison, these include:

  • Security
  • Interest rates
  • Amount of money that you need to borrow
  • Loan term and frequency of repayments
  • Additional fees

Many lenders will offer very competitive features, so shopping around before you borrow is a smart option. We’ve written a short summary of each feature so you can determine what features you prefer for your car loan. If you have an idea of what you’re looking for, this will make your car loan comparison much easier. 

Security

Many lenders will allow you to choose between a secured or unsecured car loan. A secured car loan requires you to put up an asset as collateral (or security). In the case of car loans, this will typically be your car. If it is the case that you fail to make your repayments on the loan, the lender will be able to repossess your car. In exchange for offering your car as collateral, you’ll usually benefit from lower interest rates and fees. If you’re a reliable borrower and are confident in your ability to make all repayments, secured car loans are usually the best option.

Contrast this against an unsecured car loan, in which no asset is offered as security. The lender will not be able to repossess your car if you fail to make your repayments. In order to offset this risk, the lender will generally charge higher interest rates and fees on the loan. 

Interest rates

Be wary of interest rates, as they are arguably the most important aspect to consider in your car loan comparison. Interest is a small percentage of the loan amount that is payable on top of your loan repayments. Think of it as a small fee charged by the lender for their service of providing money to you upfront.  Many lenders will offer competitive interest rates on their car loans. For this reason, it’s important to note the difference between advertised interest rates so you know what you are paying for.

Fixed and variable interest rates

Lenders will either offer a fixed or variable interest rate. A fixed interest rate refers to an agreed-upon rate that will not change during the life of your loan. Comparatively, a variable interest rate is subject to change depending on the loan market.  

Base rates and comparison rates 

You should be careful to note the difference between base (or advertised) rates and comparison rates. A base interest rate is solely a percentage of your loan that is charged on top of your regular repayments. On the other hand, a comparison interest rate allows you to compare the true cost of the loan. In addition to the base rate, comparison rates are inclusive of fees. Account keeping fees, servicing fees, car insurance fees or application and establishment fees are examples of fees typically included in comparison rates. 

These fees, with the exception of the application and establishment fees, are generally ongoing costs. One-off fees, or fees triggered by certain events, are often not included in the comparison rate. Examples of these one-off fees include exit and discharge fees, early repayment fees, redraw fees, late repayment fees or stamp duty. 

Lenders are legally required to advertise their car loan comparison rates. However, it may be advertised in smaller text than the base rate, so be sure to search for it. 

Amount of money to borrow

The amount you will borrow will differ significantly depending on the type of car you are looking to purchase. Of course, brand new cars will generally be more expensive than second hand cars. Depending on the price, you may not need a loan to cover the whole purchase either. You could apply for a loan to cover a percentage of the purchase price and pay the rest upfront. It ultimately comes down to your needs.

Having an idea of how much you need to borrow will be crucial to helping you compare lenders offering similar loans. If there is a lender you like that offers great features but for a different loan amount, have a chat to them to see what they could do for you. 

Loan term 

The loan term is the time period that you have to repay the loan in. Carefully consider how long or short you would like the term to be, as this will be dictated by your ability to repay the loan. Longer terms allow for more financial flexibility as you are paying less each repayment. However, the downside to this is that you will accrue more in interest and potentially also in fees. This can cost you more over the life of the loan.

On the other hand, a shorter loan term may prove more stressful as you have to pay more per instalment. Not everyone can afford to pay off a loan quickly. However, the benefits are that you will accrue less in interest. 

Frequency of repayments 

Regular loan repayments are made either monthly, fortnightly or weekly. The most common instalment frequency is monthly, but there may be options to change this if you wish. Have a look at your income and your outgoing expenses to see how regularly you can afford to make repayments. The frequency of repayments won’t significantly affect the amount you are paying in interest. 

Additional fees 

Many lenders will charge additional fees for certain processes or events. These won’t often be included in the total price of the loan, so be wary of any fine print that notifies you of these fees. A few examples include:

Establishment / application fee: Fees that are charged in order to set up your account with the lender or kickstart your application. Typically a one-off cost to cover the cost of processing your loan documents.
Exit / discharge fees: Often charged fee if you choose to exit the loan for whatever reason (such as refinancing). This fee may cover the cost of settling the balance of your loan and closing your account. 
Early repayment fees:  Some lenders may charge this if you choose to pay off your loan early. This is generally to offset the profit they will make on your interest repayments.
Redraw fee:  Some lenders may allow you to reborrow or ‘redraw’ money once you’ve paid off some of your loan. 
Late payment fees:  A penalty charge when you fail to make your repayment on time. 

Financial calculations 

Though much of your car loan comparison will come from looking at what features lenders offer and choosing which are more suited to you, sometimes crunching numbers can get tricky. A car loan calculator is a helpful tool that allows you to estimate the total cost of your car loan. You will be able to enter the amount you would like to borrow, the interest rate, and the loan term. The calculator will do all the hard calculations for you so that you can assess and compare your options. This makes car loan comparison just that bit easier. 

Be aware that car loan calculators are only intended as a guide. They also do not include many other features, such as whether your car loan is secured or your credit score. These factors will influence how much you are able to borrow. They also don’t calculate the cost of additional fees, unless any of those fees were included in the comparison interest rate. Make sure you add these figures onto the total amount to get the true cost of your potential car loan.

What are other options of car finance?

Of course, car loans aren’t the only way in which you can purchase a car. There are a variety of other options out there for you to consider if you don’t wish to take out a car loan. 

Outright purchase Car loans can be contrasted against a simple outright purchase. This is arguably the cheapest way as you won’t accrue interest or other fees. It also doesn’t leave you with any debt. For many though, cars are simply too expensive for an outright purchase to be a smart financial choice.
Hire purchase agreement A hire purchase agreement is another method of financing a car. In a hire purchase agreement, you will pay a deposit and then make regular repayments of the rest of the purchase price to the car dealer. This is very similar to a car loan, though your arrangement is directly with the car dealer and not with a lender such as a bank. Essentially, you are ‘hiring’ the car as you won’t own it until you make the final repayment. 
Personal contract purchase A person contract purchase is similar to a hire purchase agreement, but you usually will make lower monthly repayments. Instead of getting a loan for the full cost of the car, you will get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement. The predicted price at the end of the agreement is usually based on the forecasted mileage. At the end of the contract term, you can choose to trade the car in and start again, or hand it back to the dealer.
Lease The last common option is a lease. With a lease, you will pay the dealer a fixed monthly amount in exchange for using the car. There will usually be conditions on the lease, such as not exceeding a particular mileage amount. When the lease comes to an end, you hand the car back to the dealer.

Finding the right car loan for you

Conducting your own car loan comparison is no easy feat. At Oiyo, we write helpful guides covering a range of financial topics to help you make informed decisions. We’re not financial advisors, but we can provide some tips and tricks when it comes to managing your money. 

Hopefully, this article helped shed some light on how to get started on your comparison journey. If you’re on the hunt for a car loan and looking for some more helpful insights, check out our Car Loans page for more.

Home insurance can get tricky. Find a policy that’s suited to you and your budget. You can also check out our guide for bad credit car loans

 

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Georgia Matthews

Written by Georgia Matthews

Georgia Matthews is a contributing Writer at Oiyo. She is currently studying a dual Bachelor of Laws / Bachelor of Arts (majoring in history and psychology) from the University of Queensland. Georgia has worked in a few law firms during her studies and is currently working in a corporate law firm. She is most passionate about writing, history, and travelling.

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