Choose the loan before you choose the car. Knowing your budget and repayment first keeps you in charge at the dealership.
If you live in Hawthorn East, you could be weighing up a reliable used car for the school run, the commute or both. This guide covers the decisions that matter most, in the order they come up.
How Does a Secured Used Car Loan Work?
A secured car loan uses the vehicle as security for the loan. Because the lender has something to fall back on, the interest rate is often lower than on an unsecured personal loan, depending on the lender and your circumstances.
The trade-off is that the lender can repossess the car if you stop making repayments. Lenders may also set limits on the age or kilometres of a used vehicle, so check this before you fall for a particular car. If you are comparing a car loan with a personal loan, ask about both rate and vehicle conditions.
Pre-Approved Car Loan: Why Get One Before You Shop
A pre-approved car loan gives you a clear budget before you visit a dealer or private seller. It is not a final commitment, because approval usually depends on the car you pick and your circumstances at the time.
My view is that this is the best habit a buyer can build. You negotiate on the price of the car, not on a finance package put together on the spot. The cost is a credit enquiry on your file, so apply once you are serious, not for every car you browse.
Car Loan Repayments: A Worked Example
Monthly repayments depend on the loan amount, the term and the interest rate, so it pays to test a few combinations. Here is an illustration using an example rate of 6.75% p.a.
Consider a buyer who borrows $25,000 over five years at 6.75% p.a. Their monthly repayment would be about $492. Over the full term they would repay roughly $29,500, which means about $4,500 in interest. Stretching the same loan to seven years at the same rate lowers the repayment to about $374 a month. The total repaid rises to roughly $31,400, so the interest cost grows to about $6,400.
The outcome for this buyer is a choice between a lower monthly cost and a lower total cost. They decide that $492 fits their budget, so they take the five-year term and pay less interest overall. This is an illustration only. Your actual rate depends on the lender, your credit history and the car. Use our calculators to test your own numbers.
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Should You Use Dealer Finance or a Broker?
Dealer finance is convenient because it is arranged at the point of sale, but it usually offers access to a limited set of lenders. A broker can compare options from a wider panel of lenders, which is helpful when you want a car loan comparison without calling each lender yourself.
The trade-off with any arrangement is that convenience and choice are different things. Ask any provider for the comparison rate, the fees and the total amount you will repay, not just the monthly figure. Our team at Zella can walk you through car loan options and explain each one in plain English.
Balloon Payments: Lower Repayments With a Catch
A balloon payment is a lump sum due at the end of the loan, which lowers your regular repayments in the meantime. It suits some buyers, but it needs a plan.
The risk is that you owe a large amount at the end, and the car may be worth less than you expect. You also pay interest on the balloon amount for the whole term. For a family car you plan to keep for years, a standard loan with no balloon is often the more comfortable choice.
What Happens If You Already Have a Car Loan?
If you already have a car loan, you may be able to refinance it to a different rate or term. This could help if your circumstances have improved since you took it out.
Before you switch, check for exit fees, new establishment fees and whether a longer term would cost you more interest overall. Our car loan refinance page explains how this works.
Getting Your Application Ready
A lender will want to see that you can afford the repayments, so tidy up your other commitments first. Reducing credit card limits you do not use, for example, could help your borrowing position. Your broker can then handle the application and talk to lenders for you, so you spend your time inspecting cars, not chasing paperwork.
If you also own a home in the area, a conversation with your broker about your overall finances is worthwhile. Our Hawthorn East team knows the local area well and can look at the full picture.
Frequently Asked Questions
Is a secured car loan cheaper than a personal loan?
A secured car loan often has a lower interest rate than an unsecured personal loan, though this depends on the lender and your circumstances. The trade-off is that the car is held as security, so it could be repossessed if repayments are missed.
What is a pre-approved car loan?
It is an indication of how much a lender may let you borrow before you choose a car. Final approval usually depends on the vehicle and your circumstances at the time.
How much would a $25,000 car loan cost each month?
At an illustrative rate of 6.75% p.a. over five years, repayments would be about $492 a month. Your actual rate and repayment will depend on the lender and your circumstances.
Should I take a balloon payment on a used car loan?
A balloon payment lowers your regular repayments but leaves a lump sum due at the end. You also pay interest on that amount throughout the loan, so it needs a clear plan.
