What is a new car loan?

A new car loan is a type of secured personal loan used to buy either a brand new or lightly used vehicle.

Lenders often charge lower rates for newer cars compared to older vehicles, since there's less perceived risk. When the loan is secured by the vehicle itself, it means the lender needs to be able to recoup any loss from the borrower defaulting by reselling it. Newer vehicles are often less likely to breakdown and become inoperable - they also less likely to be written off due to cost, in the event of an accident - so there's less of a risk premium in the interest rate.

When you take out a new car loan, the lender will cover the entire cost of the vehicle unless you've paid a deposit. You enter into an agreement with the lender to repay the loan amount plus interest, over regular instalments (weekly, fortnightly, monthly) over an agreed loan term.

During the loan application process, you'll probably need to provide details about the car you'll be buying so the lender can verify whether it meets their criteria. If the loan product is only for cars less than three years old, you'll need to demonstrate that you aren't buying something too old.

Types of new car finance

New car loans are typically secured, but can be unsecured, too.

Secured car loan

Secured car loans require the vehicle you're purchasing as collateral. This means that if you default on the loan, the lender has the right to repossess the vehicle. While this is a steep price to pay, secured car loans generally have lower rates.

In some circumstances, you might be able to use another asset as collateral. Examples could include:

  • Term deposits

  • Property (could be risky)

  • Other high-cost items such as jewellery (talk to your lender to determine what will/won't be accepted)

Unsecured car loan

An unsecured car loan is effectively just an unsecured personal loan. If you buy a car using an unsecured loan your lender can't repossess the car, which generally means rates are significantly higher.

While unsecured car loans don't require collateral, a lender could come after you in another fashion. The debt might be sold on to a debt collection agency or you might end up in court, so it's far from consequence-free if you can't pay.

As they don't have a security, the lender might also be more choosy with whom they loan money. For example, to get a good rate, you might need to be earning good money and have a high credit score.

How to compare new car loans

Comparing your options to find a new car loan that suits your personal and financial needs best is important. So, here are some of the features to consider:

1. Interest rate

The interest rate will determine the size of your regular repayments. A fixed rate will remain the same throughout the duration of the fixed term, while variable rates fluctuate with the market.

Don't forget to also look at the comparison rate, which gives you a better idea of the total cost of the loan as it incorporates any additional costs.

2. Fees

Extra fees on car loans can include:

  • Loan application fees

  • Establishment fees

  • Monthly/annual fees

  • Late payment fees

  • Early repayment fees

  • Exit fees

A car loan might have a low advertised rate, but charge a lot of fees, which can add up, and will be reflected in the comparison rate.

3. Loan term

The loan term is the length of time it will take to pay off the loan. New car loans tend to have loan terms between three and five years, although some lenders may offer up to seven years.

The shorter the loan term, the less interest you'll pay, but that also means your regular repayments will be higher. If you're after the convenience of lower repayments, you may need to opt for a longer loan term. The general rule of thumb when looking at a new car loan term is to pick the shortest one you can comfortably accommodate in your budget.

4. Extra features and flexibility

Some lenders may offer extra features that make the loan more appealing. Examples include unlimited extra payments without cost, or a redraw facility that allows you to withdraw any extra repayments you've made.

Balloon Payments Explained

Balloon payments are another common inclusion on car loan products. A balloon payment is a 30-50% lump sum repayment of the loan that some borrowers opt to pay at the end of the loan term. They allow you to make smaller repayments over the loan term, but could cost you more in interest overall you pay interest on the balloon amount, still.

New car loan low interest rates

Here's what you can do to maximise your change of getting a low interest rate on a new car loan:

  • Choose a secured car loan - As you've opted to put security against the loan, a secured car loan will typically come with a lower interest rate, saving you money in the long run.

  • Ensure your credit score is up to scratch - A higher credit score means you might have access to lower interest rates, give you greater negotiating power, among other benefits. Secured lending is generally less reliant on a tip-top credit score, but it doesn't hurt.

  • Build up a deposit or choose a balloon payment - A deposit will lower the total amount borrowed and therefore reduce your repayments. Conversely, you could consider a balloon payment - since they typically account for a large proportion of the car loan's balance, they can reduce your loan repayments.

  • Shop around - Don't accept the first low interest car loan you see or just take what's on offer from the dealer. There are all sorts of different products on the market, so it's worth your while to explore a variety of different options.

  • Stable employment - A steady income and a low debt-to-income ratio is much more attractive to a lender. It can be harder to get a new car loan if you're casually employed or starting up your own business.