4 major factors influencing your car loan interest rate

author-avatar By on July 02, 2018
4 major factors influencing your car loan interest rate

If you’re looking at car loans, it pays to be prepared.

We look at some of the factors that can influence the interest rate you can get on a car loan.

What is a car loan interest rate?

When applying for a car loan (or any type of loan for that matter), it’s important to look at interest rates. An interest rate is essentially a fee you’re charged for borrowing money from a lender. It is expressed as a percentage of the total loan amount per annum (or year).

In the market for a new car? The table below features car loans with some of the lowest fixed interest rates on the market.

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayment
 
4.67% 5.22% $562 Go to site
New Car Loan
5.45% 5.80% $572 Go to site

Data accurate as at 01 August 2020. Rates based on a loan of $30,000 for a five-year loan term. Products sorted by advertised rate, then by company name (A-Z). View disclaimer.

There are a number factors that can influence the potential car loan interest rate you can get – such as your personal finances, credit history, deposits and not to mention the amount of shopping around that you do. Let’s have a closer look at some of these factors.

Financial Status

The first thing a lender will want to see when determining your car loan interest rate is evidence of your financial status. Factors like your current income, other loans or credit you might be paying off and your spending habits have a big influence on your potential interest rate. A way to help reduce this process is to sit down and calculate how much you can realistically afford each month. A car loan calculator can be a great tool to help you figure out how much repayments will cost you.

Vehicle age

Vehicle age is another thing that lenders will take into consideration, with some lenders refusing to loan if the car is older than five years. This is because cars are one of the common purchases that lose value (depreciate) over time. If you default on a payment and the lender has to seize your car and sell it, they may not get the full amount they’re owed back from the sale. This is not good business for a lender!

There are some lenders that will still provide a loan for a car over five years old, but they will usually charge a higher interest rate to factor in the additional risk they are taking on with that particular loan.

Credit history

Your credit score indicates to a lender how much of a ‘risk’ you are as a borrower. Many people think that by applying to multiple lenders at the same time, they can get the best interest rate possible. However, each time you apply for credit, your score can be negatively impacted – so making multiple applications could backfire and end up impacting your credit score which will impact your interest rate. Make sure you’re aware of your credit rating before applying for a loan because if your application is rejected by the lender, this could also impact your credit history.

Your research

Did you know that the difference between the highest and lowest car loan interest rates on the market at the time of writing is more than 9% p.a.? While there are some factors outside of your control that can determine your car loan’s interest rate, you can always shop around to give yourself a better chance of securing a good rate. By doing some research, you could be saving yourself thousands in interest payments over the life of the loan. That’s money that could be put towards your home loan, savings, renovations or even a holiday. Ultimately, interest rates are calculated on personal circumstances but there’s no harm in being prepared.

Frequently asked questions

1. Am I eligible for a car loan?

Your eligibility for a car loan will depend on a variety of factors such as: the car model, whether the car is new or used, the lender and the loan you're applying for, your income, your credit rating and history, your assets and liabilities, and your history of savings. Having a bad credit rating doesn't disqualify you from getting car loans, but you might find it harder to get a good one.

2. Can I apply for a car loan with bad credit?

If you have bad credit, you can boost your chances of being approved for a car loan by: being realistic in your expectations & picking a modest car, being honest in your application, save some money beforehand, obtain stable employment, and clean up existing debts. Also work towards improving your credit history beforehand by paying bills and credit card repayments on time.

3. What are the differences between secured & unsecured car loans?

A secured car loan is one where an asset (the car you’re buying) is used as collateral against the loan, and can be reclaimed by the lender if repayments aren't met. Unsecured car loans do not use your car as security. Secured car loans are generally less risky for lenders to provide than unsecured car loans, so they often have lower interest rates.

4. Is it better to borrow from the bank or from dealer?

Car loans and dealer finance can be acceptable methods of car financing, so long as you do your due diligence and shop around. Dealer finance can often have faster approval times and lower interest rates compared to car loans, but they can also be less flexible and more restrictive. If you're torn between the two, consider walking into a dealership with a pre-approved car loan under your belt and negotiating with the dealer to see if they can offer a better rate. For any type of car financing, be sure to take all the fees into account and look at what the total cost of the finance would be at the end of the term.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states.

In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $30,000 loan over 5 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked as a Senior Journalist at financial research firm Canstar before helping to launch Savings.com.au in November 2018. Dominic aspires to help everyday Australians discover simple and effective ways to comfortably manage their finances and save money, without sacrificing their joie de vivre.

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