What Rates and Fees Will Apply to my Car Loan?
Your car loan repayments are made up of:
- The amount you borrow
- The rate charged on the outstanding balance
- Car loan fees
To understand what you are paying for in each repayment, you need to know what the rates and fees attached to your car loan mean.
Read on here to find out how car finance really works.
This information is found in your car loan contract, the document you receive before being approved for the car loan.
When you receive the car loan contract, you are not obliged to continue with the loan, but once you sign and return it, you are bound by the contract.
Here's what to look at before you sign the contract:
Car loan rates and fees
With all car loan contracts, there will be a difference between the amount you borrow and the total amount you pay for the car loan.
This gap is made up of the rates and fees charged.
Before you agree to the contract, consider whether the car is worth this much to you.
What is my car loan rate?
The rate is a percentage charged against the outstanding balance on the loan each month. This percentage is known as 'interest'. It is calculated daily and added to the loan balance each month.
You can reduce your interest costs by reducing your car loan balance.
What are car loan fees?
Car loan fees are fixed amounts set out in the contract that are charged. There's usually a specific trigger that attracts a fee.
Common car loan fees include:
- Application fee: a one-off fee for establishing the car loan account.
Monthly fee: this is an account fee charged for administration. It's the same every month until the account is closed.
Early payment fee: some lenders charge a fee for extra payments to the loan.
Late payment fee: you might be charged if a scheduled direct debit fails.
Break fees: if you close your account before the date set out in the contract, you may be charged a termination or break fee.
What rates and fees should I look for?
Firstly, you should be aware that if you pay a low interest rate, this might be countered by the fees applied to your loan.
Find out more about low interest rate car loans.
The car loan market has become more competitive recently, and it's now easier to find loans that charge minimal fees, and allow you to repay your loan early.
The type of car loan that you choose will depend on your reason for buying the car. Learn more by reading this guide to choosing the right car loan, and remember you can always discuss your exact use case with a car loan advisor to compare the options available.
Example 1: Paying out the loan early
If you prefer to reduce the debt fast, you might choose a higher interest rate option with no early payment or break fees. This benefits you if you need to sell the car, as it's then unencumbered.
Paying out the car loan quickly also frees up your income for other purposes.
Example 2: Running a car in a business
Business car loans taken out under an ABN often have lower interest rates than personal car loans. Plus you can claim interest against your BAS, so there's no real advantage to pay out the car loan early.
In this case, you might choose a car loan with lower interest rates, but fees for early payment. You don't expect to pay these fees, and you'll benefit from the lower cost of the interest over the loan term.
Learn more about managing car loan repayments before you choose a loan.
Novated leases are required by law to include a balloon payment, and chattel mortgages often have one too. So what is a balloon, and how does it affect your car loan?
Briefly, a balloon payment is a lump sum payable at the end of the loan term. You pay interest on this amount during your loan term.
Find out more about when you should use a balloon payment.
A balloon payment might reduce your interest rate and repayments during the loan, but if you can't repay it at the end of the loan, you might have to refinance and take out another loan to pay the balloon.
This makes your car loan longer and more costly than you initially anticipated, so consider the other options, such as providing a deposit toward the purchase, before agreeing to a balloon payment.
Now you can sign a car loan contract with confidence, and understand the implications of the terms used and how they affect your finances.
For car loan options or to seek further advice about getting a car loan, a Positive loan adviser can help you with information that applies to your individual needs.