Car loans: the basics
Interest rates can be confusing. There are loads of lenders out there, all saying the same thing—they offer low-interest car loans. But who's really telling the truth? To make buying a car a bit simpler, we've decided to do the research for you and find out what a low-interest car loan rate really looks like in 2017.
One of the first things to think about is that there are different types of car loans offered by lenders. The two main types are secured and unsecured.
- Secured means that you use the car you're buying as collateral for the loan, so if you miss repayments the lender can take ownership of your vehicle.
- If the loan is unsecured the lender has no rights to your property.
Because secured loans are less risky for the lender, interest rates are considerably lower compared to unsecured loans. However, there are usually restrictions on the kinds of cars you can purchase using a secured loan. These may include the make and type of ve hicle as well as its age. Sometimes lenders may also demand a minimum loan amount.
It's always important to remember these rates are just guides. For example, business loans may offer significantly lower rates. Make sure you're exploring all of your options and ensuring you've picked the right loan for you.
- A Chattel Mortgage. This is where a lender provides funds to a business (rather than the individual) for the purchase of a work vehicle.
- Car Refinancing. This is where you transfer your loan from one lender to another, usually in order to lower interest rates, reduce monthly repayments, or to add other features.
- A Novated Lease. This is an agreement between the lender, employer, and employee. Here, the employer purchases a vehicle for the employee and deducts the loan repayments as 'salary-sacrificing'.
Secured car loan rates
So what sort of rate should you expect for a secured car loan in 2017? Lenders typically publish two rates—the advertised rate and the comparison rate. The advertised rate is the specific rate of interest you'll pay on your loan, not including additional fees and charges. The comparison rate includes those fees and charges so you can understand the effective rate of interest on the amount borrowed.
For our research, we used a $25,000 loan as an example—which is certainly enough to buy a quality late-model used car or a modest brand-new one—and a loan term of up to 15 years. The comparison rates factors in an assumed yearly income of at least $40,000.
Based on this example, here's how the rates add up:
- Low - Anything below 7%, with below 4.5% being very low.
- Medium - Above 7% and below 10%.
- High - Above 10% should be considered high for this type of loan.
Unsecured car loan rates
An unsecured car loan is usually used to purchase a vehicle that is at least five-to-seven years old. The amounts can vary, but for this example, we'll use a loan of $10,000 that we are looking to pay off fairly quickly, within five years. Again, the applicant is assumed to have an income of at least $40,000 per year.
- Low - Anything below 14%, with below 13% being very low.
- Medium - Above 14%, but below 16% is about average.
- High - Above 16% should be considered high for this type of loan.
As you can see, the comparison rates are considerably higher for unsecured loans as they factor in this extra risk to the lender. On the plus side, you have more flexibility in the type of vehicle you can purchase.
Finding a low-interest car loan
Securing a car loan can be easier than you think. These examples are a just a guide but they should give you a reasonable idea of the going rates. Rapid Finance are the low-interest finance experts, and our experienced and friendly brokers may help get the best possible interest rate on your car loan.