Car loans

To help you separate the good car loans and the bad car loans, this little summary should do the trick.

A low interest rate

A quick scan of the market at the time of writing (September 2018) for a variable rate new secured car loan shows you could get a rate of 5.34% (5.97% comparison rate) from one lender, which is pretty low. At the other end of the scale, another lender is offering a loan with an interest rate of 10.70% (10.90% comparison rate). If Jake (our ute-buyer from the earlier example) was to borrow $25,000 from either of these lenders, these would be his estimated interest costs:

As you can see, the car loan with the 10.70% interest rate could cost Jake almost $4,000 more in interest over the five years. So the lower the interest rate you can get, the better.

Little to no fees (low comparison rate)

But don't focus too much on the advertised interest rate at the expense (pun intended) of looking at the fees. There are some lenders who advertise a low rate on the loan, and it very well might be, but they might make up for it with exorbitant fees instead. As we explained earlier, looking at the comparison rate can help prevent you from falling for such traps, because they factor in upfront and ongoing fees. But some incidental fees (such as the costs of refinancing or early payout fees) aren't factored into the comparison rate, so it's worth looking into these to prevent being caught off guard in the event you need to pay them.

Extra features that suit you

Some car loan features to consider in a car loan include:

• Pre-approval option (e.g. to help you negotiate with car dealers)
• Flexibility to switch between weekly, fortnightly and monthly repayments
• Balloon payment options
• Flexibility to make additional repayments
• Redraw facility

Don't go for convenience over affordability, flexibility and practicality. If you just walk into any dealership and accept the first financing deal you're offered, you're more likely to be stuck with inflexible terms, a lack of ongoing support and higher interest rates and fees. Always compare other options before you sign up to anything and read as much as you can about car loans to check if you're getting a good value deal.
Read more about the differences between dealer finance and car loans
To spot a scam car loan, ASIC recommends first checking if they're on their list of unlicensed companies.

As much as it would simplify things, there isn't just one generic type of car loans. There are multiple different types:

• Secured car loans
• Unsecured car loans

Which are further divided into:

• New car loans
• Used car loans

Secured vs unsecured car loans

Primarily, car loans are either secured or unsecured. Secured car loans involve you using the car you've purchased as a security on the loan, meaning that the car can be repossessed by the lender if you fail to meet the repayments. With this safety net, lenders often offer lower rates and fees on secured car loans. You may find it harder to get a secured car loan on a used car that's over five years old. Unsecured car loans, as you might have guessed, do not use the car as a security, so they're essentially a personal loan. This comes with the tradeoff of potentially higher rates and fees, and the possibility of legal action from your lender if you stop making your repayments.

New and used car loans

You can take out a car loan for both new cars and old cars, although certain loan products will only be available for one or the other. New cars are seen as less of a risk, because they can be resold for a higher amount. For this reason, new car loans often have a lower interest rate than used car loans, but since new cars are usually more expensive, you may need to borrow more to buy them. Different lenders have different criteria for how they define 'new' and 'used', although a common one in the industry is around five years or more for used cars.

Not so fast there sport. You might be anxious to get into your hot new wheels, but before you even consider going to a dealer or lender, you'll need to have a handful of forms and documents on you so they can get the measure of you as a person and as a borrower. Remember, it's their money that you're being lent, so your trustworthiness and strength of character will play a huge part in the terms you get given. When formally applying for a car loan, you'll generally need:

• 100 points of ID (at least): can include your drivers' license, passport, Medicare card and more
• The vehicle details: the make and model, registration number, engine number and purchase price, as well as whether it's new or pre-owned
• Proof of income: you might need two or three recent payslips as well as proof of employment, employer contact information and two years worth of tax returns for those of you who are self-employed
• Assets and liabilities: details on any properties you own, any other loans you have, your ongoing expenses and any other debts, such as credit cards.

Once all of that nerd stuff is out of the way, you can dive in and apply for your car loan - assuming you've done some thorough research into which one is best for you. Thankfully, applying for a car loan in the modern age is quick and relatively painless, as there are a host of entirely online-lenders that can fast-track your application if you have all of this information handy. The usual process involves:

1. You filling out an application form or filling in the blanks online
2. Your application is reviewed by a credit officer
3. The lender will then request your documents (possibly not all of them)
4. Upon acceptance of the loan, you'll be asked to sign it
5. Your loan will then be funded, either directly to the person or dealer you're buying the car from or in the form of a cheque

Bear in mind that those of you who are under 18 or not yet an Australian citizen may not qualify for a standard car loan product.

If you're unsure about how to proceed with your car loan, you can always reach out to a car loan expert or financial advisor to get help finding a suitable product. There are hundreds of car loan products on the market, so it's easy to feel overwhelmed by them all. Don't let that happen! Keep your cool and remember what we said about comparing interest rates, fees and features.