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Best Car Loan Rates

With winter just around the corner, why not brighten up your day by upgrading your car.

The end of the financial year is a great time to buy a new or used car as you car often snap up a bargain in the EOFY sales.

Importantly, there are also some great interest rates on offer for car finance at this time of the year as well.

When looking to purchase a car on finance, a regulated car loan is the smart option. Firstly, being regulated by the National Credit Code gives you peace of mind that there are no hidden fees or charges. However, subject to the lender credit criteria, you still have the flexibility to choose your loan term and level of deposit. By increasing your deposit or lengthening the loan term, you lower your monthly loan repayments.


How Car Loan Interest Rates are determined

And now the ever important question, “What interest rate will I be charged for my car loan?”

Every credit provider will assess a loan application and the associated credit risk differently.

Some lenders adhere to a rate-for-risk model, where various factors are taken into account to determine the interest rate you may be charged; such as your credit rating, residential and employment details and stability, the type of car you’re buying, whether its new or used and how old it is, and the structure of the loan including how much deposit you have contributed or trade-in equity you have.

Whereas other credit providers may apply a flat interest rate model based on whether the car you are buying is new or used or link the interest rate to specific factors such as whether you’re a home owner or professional.

In general, if you and/or the goods you are buying are considered by credit providers to be low-risk, you will usually be charged a low interest rate; if you and/or the goods you are buying are considered high risk, the interest rate you will be charged is likely to be higher.




Maintaining a healthy credit file is the simplest way to get the best car loan rates.



How to get the Best Car Finance Rates

Whilst the rate-of-risk model generally used by financial institutions is out of your control, there are a number of factors you can control that have a significant impact on the interest rate you end up paying.


Secured Car Loan

Providing security for a loan lowers the risk for the lender. So if you’re weighing up whether to take out a secured or unsecured loan for your next car purchase, the general rule is the interest rate will be lower for the secured car loan product.

When you borrow using a secured car loan it means the car, whilst still legally in your name, has been mortgaged by the lender as security for the total amount financed under the loan contract. In the event of repayment default, the car can be repossessed by the lender and sold at auction in order to recover the outstanding balance of your loan.

What’s the downside?

Very little. Even though you may have provided security by way of the goods being financed, under both a secured and unsecured loan, in Australia you are personally liable for any shortfall on a loan, so why not take advantage of the discounted interest rate provided by using a secured car loan.


Age of Car

Typically the credit risk profile of borrowers decreases as the age of car gets older – excluding the buyers of classic cars.

Therefore, buying a new or near new (1-4 years of age) vehicle could be a smart option as the credit risk associated with the loan substantially improves resulting in a lower interest rate.

However, if you’ve got your heart set on an older vehicle or classic car, it pays to check the loan product rules for the lender upfront. In many cases, the major banks will only offer the secured car loan product if the car you’re buying is New to 7 years of age, otherwise the unsecured personal loan product applies – which has a higher interest rate.


Shopping Around for Credit

It’s always a good idea to do your research when buying a new car – and that applies to car finance as well.

However, when it comes to your credit score, the worst thing you can do is actually submit full loan applications to multiple lenders, as your credit score is dynamic and reduces each time you apply as the algorithms used by credit reporting bodies assume that if you’re applying for a loan again that you weren’t successful on the previous loan application – hence the reduction in your credit score.

Be very cautious of any applications submitted through car dealers, finance brokers or aggregators and ask them to be very clear with what they will do with your credit application, as quite often they could send it to a number of lenders on their panel which reduces your credit score each time and could ultimately prevent you from obtaining approval for your loan.

We recommend you don’t sign a generic privacy act consent that entitles the car dealer to submit your loan application to multiple lenders. Instead sign the specific privacy act consent for each lender that you agree to have your application submitted to - that way you have control over the loan application process and your credit score.



Loan to Value Ratio

Another factor that can increase the interest rate you pay is the total amount borrowed (often referred to as the ‘net amount financed’) as a percentage of the value of the car you’re purchasing. This is referred to as the Loan-to-Value Ratio or LTV.

As part of the loan assessment process, lenders will compare the price you are paying against an industry valuation guide - such as those published by Glass’s Guide or Redbook.

Glass Guide Used Car Prices

Redbook Valuation Report

For most lenders, the higher the LTV the higher the interest rate.

To get the lowest rate possible, be sure to not only negotiate a good deal on the purchase price of the car but also try to maximise the value the dealer allows for your trade-in.

If your financial circumstances permit it, contributing a deposit of 10% or more will reduce the LTV into a safe zone ahead of the depreciation curve, again enabling the lender to reduce the interest rate you end up paying.

Credit History

Finally, your credit history and how you have managed your debts and credit file in the past is, without a doubt, the most important factor to secure a lower interest rate. This is becoming more the case with the emergence of comprehensive or positive credit reporting, ‘fintech’ lenders & processes within the banks that rely heavily on your personal data set.

If you haven’t don’t it recently, contact Equifax for a copy of your credit report.

Review the details contained on the report and make sure it is accurate.

Most importantly, when making a loan application to a lender, always ensure you provide true and correct information. Conflicting information on your file regarding your current address, previous addresses or your employer details, could be taking to be a sign of fraud, and even if you loan application is not declined the higher risk flag will result in a higher interest rate.

It’s also important to know that your credit scores keep changing over time, as each credit provider and each credit reporting body obtains more up to date information about you or changes their formula for calculating your score.

Perhaps the simplest way to get the best car loan rates and maintain a healthy credit file is to pay your bills on time and ensure that you meet your loan repayments.


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