If you're searching for a cheap car loan, the interest rate is always important. But it pays to think about more than just the size of your repayments.
Car loans are packed with different fees, features, payment schedules and add-ons. Some of which can really help, or hinder, your budget.
So when looking for the best car loan, it pays to consider all of these factors … starting, of course, with the lowest interest rates.
When looking for the best car loan for your budget, it's also important to:
Shop around
When searching for the best cheap car loan, the most important thing to do is shop around. While it may be convenient to arrange finance through the dealership you're buying your car from, it's not always the best deal.
For example, even if the interest rate you are offered is competitive, you may be liable for extra fees, for example a commission for the dealer involved.
Also, having your finances in place before you start your search for a new car will give you a budget to work to. Plus, by being able to offer the dealer cash, you'll have more leverage when negotiating the best price.
Compare interest rates
The interest rate isn't everything, but it is the biggest factor to consider with a car loan. No matter how many add-ons and special benefits you are offered, if the interest rate is well above average, it probably isn’t the best car loan for you.
So first, always look for car loans with the lowest interest rates. However, as long as your loan has a competitive interest rate, it doesn't necessarily have to be the lowest on the market. Remember, the interest rate isn't everything.
Another factor to consider is that the interest rate on your loan can be fixed or variable. If you prefer certainty over the size of your repayments, choose a fixed rate. If you feel the market could favour you, and interest rates might fall, you might prefer a variable rate.
Check your credit score
Your credit score can also impact the interest rate you are offered. Most lenders look at your credit history when determining what rate to offer you, and the lowest interest rates are reserved for those with the best credit scores.
You can easily check your credit score for free. If yours isn't as high as you'd like, there are steps you could take to help improve it.
You can get a free copy of your credit report from these credit reporting companies:
Review any fees
There's a long list of fees associated with personal loans, including establishment fees, monthly service fees, missed payment fees, and ones for making extra repayments or paying off the loan early.
When comparing loans with similar interest rates, it pays to look into their fees, as they can vary substantially.
Also some fees might directly impact your financial plans. For example, if you want to pay off your loan as quickly as possible, you might want to choose a loan that charges no fees for this facility.
But, ultimately, some fees are unavoidable and, if high, they can eat into any savings a low interest rate provides.
Features and flexibility
Loans come with varying features and levels of flexibility. As mentioned above, some loans charge for the freedom of making additional repayments, or paying off the loan early.
Typically, a loan with more flexibility will come with a higher interest rate. But, depending on your needs, the flexibility may be worth it, as long as the rate isn't too high.
If you're able to make additional payments, you could pay off your loan early, reducing its overall cost. So, in this case, the flexibility of making extra payments could be worth it. Of course, as long as the interest rate makes it worthwhile.
Another handy feature available with some loans is a redraw facility. This allows you to make extra repayments, thus reducing your overall interest costs, but also allows you to redraw on the extra cash you've repaid, giving you instant access to your cash if needed.
Consider the loan term
Loan terms stretch from just a few months, to a few years. However, while a longer term might look attractive, because it comes with lower monthly repayments, you could end up paying a lot more in interest.
For example, the median car loan interest rate on Canstar’s database is around 14.95% p.a. For a loan of $15,000, over:
Three years, you'll pay: $520 p/m. Total interest on loan: $3706
Five years, you'll pay: $356 p/m. Total interest on loan: $6387
So while the repayments on the longer loan term look affordable, over the life of the loan, they add up to $2681 more than those of the three-year term.
