If you’re thinking of applying for a car loan, it’s worth understanding how the repayments are calculated and what to look for, before going ahead.
Here is a quick checklist to help you out.
The repayments on a car loan are determined by three important things:
Let’s look at each of these separately…
In Australia, we have a huge selection of cars available to buy.
When you first consider buying a car, you tend to start with what make and model you like.
Let’s choose 2 examples.
A new Ford Fiesta sedan, currently priced at $15,000.
A second hand Mazda 3 for $4,000.
You may think the larger the loan size, the larger the car loan repayment, but that’s actually not always the case.
This is because the newer the car (and therefore more expensive) means this often allows a longer loan repayment term to be available.
For the above examples, here is how the larger loan size can be a smaller repayment. (Interest rate and fees have been ignored to help simplify the figures.)
Let’s take the Ford Fiesta of $15,000 and spread it over 5 years. That means you would need to repay $3,000 per year (or $57.69 per week.)
If you then look at the Mazda of $4,000 and take the loan over 1 year, you would need to repay the full $4,000 in the year (or $76.92 per week.)
TIP: The loan size is important, but it doesn’t always mean the larger the loan, the larger the repayments (as the loan term can be used to influence this).
As shown above, the car loan term can greatly effect the size of your car loan repayments.
In Australia, generally, car loan terms can range from 1 – 5 years, with some lenders going up to 7.
The newer the car generally means the longer you can take the loan over, as newer cars are more valuable compared to cheaper used cars.
When you are deciding on the term of your car loan, it’s essential you ask yourself the following questions:
What are my financial goals over the next 1 – 5 years?
For example, if you are planning to buy a house, have a baby or take a year off travelling, will you be able to maintain your car loan repayments or will they affect your chances in your other goals, like buying a house?
Don’t always think putting a loan over the longest term possible is the best answer. Sometimes clearing it as fast as possible may be your better option depending on your financial goals.
Can I make extra repayments to my car loan and pay it out early without penalty?
If you do take a longer-term loan to help minimise your loan repayments, always check to see if you can make extra payments or pay the loan out early without being penalised.
Some lenders may not allow additional payments or may hit you with large fees if you want to pay the loan out early, so always confirm this before you take out a car loan.
At Fair Go Finance, we encourage our customers to make additional payments when they can, and are happy for you to repay your loan early without any penalty.
Our goal is always to help our customers move forward with their financial future. By repaying your loan ahead of schedule will also benefit you by improving your credit standing with us if you ever need another loan.
TIP: When considering your car loan term, don’t just base it on what the repayments will be. It’s important you consider your financial goals and how flexible the loan is if you want to change or adjust your payments.
Whenever you consider a car loan or any other type of loan, you should always understand what the total cost of credit is.
The total cost of credit is simply how much the loan will cost you over the whole term of the loan.
It means you need to add the interest costs, ascertainable fees such as establishment fees, monthly fees etc to the loan amount, so you know how much the loan will entirely cost you.
Some lenders may charge a low-interest rate but high fees whilst some may do it the other way around.
The key is to always ask what the total cost of credit will be, as well as obtaining a list of all possible fees that could be charged throughout the loan. This total cost figure will help you work out whether you are happy to go ahead with that lender.
Many people can get fixated only on the interest rate, rather than what the total cost of credit is.
This is particularly not wise when you are talking about small-sized loans.
For example, if you take out a loan for $2000 at 29.9% you may instantly see the interest rate and think, no way.
But do you know how much interest that calculates to be per fortnight over a 1-year term? It will be $23. Because the loan is very small, a high-interest rate does not equate to having to pay a large amount of interest.
The most common interest rates we see advertised in Australia are housing loan rates, which can be around 4.25%. This is clearly much lower than 29.9%, however, it applies to a much larger loan. So like we did above, how much interest would you pay on a $450,000 housing loan per fortnight? It will be $735.58.
TIP: Whenever you are looking at small loans, say below $10,000, don’t judge the loan purely on its interest rate. Look at the total cost of credit as well as what features and benefits the loan has (such as flexible repayment options, no early repayment fees etc.)
The easiest way to find out a car loan repayment is to use a calculator! We provide a personal loan calculator on our website so you can easily calculate what the repayments will be for all of our loan sizes and terms.
Once you have obtained your repayment, the next essential step is to make sure you can afford the repayments. Why not check out our blog “Budget? She’ll be right!”, which provides great tips on how you can make sure you can afford a new loan.