What is a new car loan?
A new car loan is a type of personal loan that lets you finance a brand new car that's under a certain age. New car loans are typically reserved for new, demo or even lightly-used vehicles. So, you don’t necessarily need to buy a brand new car, with zero kilometres from a dealership.
When you take out a new car loan, the lender will cover the entire cost of the vehicle (unless you’ve paid a deposit) as a lump sum. From there, you’ll sign an agreement with the lender to repay the loan amount (plus interest), in regular instalments (weekly, fortnightly, monthly) over an agreed period of time (loan term).
During the loan application process, a lender will likely ask you about the car you’d like to buy so they can assess its value and determine whether it passes the eligibility criteria.
Types of new car loans
There are two types of new car loans: secured loans and unsecured loans.
Secured car loan
Secured car loans require collateral, which as you might have guessed, is typically the vehicle you are purchasing. 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, a secured car loan generally has a lower interest rate.
If you don’t want to use the car as security, there are other assets you can use such as:
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Property (could be risky)
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Other high-cost items such as jewellery (talk to your lender to determine what will/won’t be accepted)
Unsecured car loan
While unsecured car loans do not require collateral, a lender could come after you in another fashion e.g. debt collector, send you to court, etc. As there is no security against the loan, an unsecured car loan is likely to have higher interest rates as there’s an increased risk.
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 how much you pay in interest charges and will also determine your regular repayment. A fixed interest rate will remain the same throughout the duration of the fixed term, while variable rates can fluctuate with the market (usually at the lender's discretion).
Don’t forget to also look at the comparison rate - gives you a better idea of the total cost of the loan as it incorporates the fees payable.
2. Fees
Compare the different fees amongst lenders, which could include:
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Loan application fees
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Establishment fees
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Monthly/annual fees
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Late payment fees
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Early repayment fees
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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 you have to pay off the loan, plus interest. New car loans tend to have loan terms of three to five years, while some lenders may offer up to seven years.
Keep in mind the shorter the loan term, the less interest you’ll pay. However, the trade-off is you’ll usually have higher weekly, fortnightly, or monthly repayments. 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 budget.
4. Extra features
Some lenders may offer extra features that are too good to be missed such as the option to make extra repayments to pay down your loan faster without incurring a fee, and/or a redraw facility that allows you to withdraw any additional repayments you've made in the case of an emergency.
Other appealing features may include fast approval times or balloon repayments. 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.
How to get a low interest rate on a new car loan
To maximise your change of getting a low interest rate on a new car loan, here’s what you can do:
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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.
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Ensure your credit score is up to scratch - A higher your credit score means you’ll likely have access to things like a lower interest rate, the ability to negotiate your terms, and more. Secured lending is generally less reliant on a tip-top credit score, but it doesn’t hurt.
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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. A balloon payment is a one-pff lump sum you agree to pay your lender at the end of the loan term. Because they typically account for a large proportion of the car loan’s balance, they can reduce your loan repayments.
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Shop around - Don’t accept the first low interest car loan you see or the one offered from the dealer. Compare what else is available and then go from there. You don’t want to miss out on a better deal.
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Stable employment - A steady income and a low debt-to-income ratio is more attractive to a lender. It might be harder to get a new car loan if you’re on casual employment or are starting up your own business.
What’s the difference between a new car loan and used car loan?
New car loans are typically reserved for brand new cars that are yet to clock kilometres on the odometer or up to five years old, depending on the lender. If you’re purchasing a car older than this, that’s where a used car loan steps in - typically for cars up to seven years old.
As new cars are considered to pose less risk to a lender than used cars, as it’s easier to calculate their value and they’re less likely to break down on the side of the road, they tend to have lower interest rates.
Also keep in mind depreciation. New cars can typically lose around 30% of their value in the first three years. While a new car might be your preferred option, a used car may save you money in the long run.
