Many borrowers often focus solely on interest rates when comparing car loans. Although these primarily influence how much borrowing money will cost you, fees and other hidden charges can significantly affect the total amount you'll pay.
Car loan fees vary by lender and the product you choose. Some may offer low or no-fee options while others tack on additional charges for almost everything, from early repayments to missed instalments.
These out-of-pocket expenses can either be a one-off or an ongoing payment to the loan provider and can turn up at different points throughout the life of your loan - typically at a pre-determined time (e.g., upon establishment) or whenever you interact with the product (e.g., redraws, if applicable).
Lenders don't always display all the costs associated with your loan. So when you're shopping around for car financing, check the comparison rate to gauge whether the product comes with a laundry list of fees.
What is a comparison rate?
The comparison rate represents both the interest rate and most of the mandatory fees and charges that come with your loan.
It is not uncommon to find a car loan with an advertised rate significantly lower than its comparison rate. This usually means you should expect a couple of fees.
Why Do Car Loan Lenders Charge Fees?
Car loan lenders charge various fees to cover the costs they incur in managing the loan throughout its term. This includes administrative tasks, credit checks, and legal services.
These charges are also associated with providing additional features (i.e., redraw facility) or discouraging certain behaviours (e.g., paying off the loan early, making late payments, etc.).
Beyond interest rates, fees are another way for lenders to generate income. Further, some are charged in compliance with rules and regulations, such as registering security interests on the Personal Property Securities Register (PPSR) for secured car loans, hence the PPSR fee (more on that below).
Fees Charged to Car Loan Borrowers in Australia
Establishment Fee
This is the fee you'll most likely see when you apply for a car loan. Also called the application fee or start-up fee, the establishment fee is a one-off payment charged by lenders to cover the administrative costs of processing the loan application, from verifying documents to drafting the contract. It ranges from $100 to $600, with some specialised lenders charging up to $990.
The establishment fee is typically only charged after the loan is approved; if the loan is denied, it doesn't apply. However, this can depend on the lender's specific policies. For example, some may charge a non-refundable application fee upfront or a small pre-application payment for credit checks.
Take note!
Australian consumer laws and responsible lending obligations require lenders to disclose whether a fee is refundable.
On the other hand, some lenders may waive this fee to look more attractive in a competitive market or present it as a promotional offer, especially for borrowers with strong credit histories or those taking out larger loans.
Ongoing or Account-keeping Fee
This is a recurring fee that your lender may charge monthly or annually throughout the life of the car loan. It is designed to cover the lender's administration and operational costs, including account maintenance, payment processing, and customer support.
Some lenders may offer loans without ongoing fees as part of promotional deals. However, those who do collect this payment generally charge between $5 and $15 per month.
Remember to carefully compare account-keeping fees across lenders, because although the amount may seem small, these can add up over the life of the loan. For instance, $15 per month for a five-year term translates to $900 in fees.
Statement Fee
This fee pays for generating and delivering periodic loan statements to borrowers. The statement fee is charged during the loan's term, either per statement issued (around $2 to $5) or as part of ongoing fees.
PPSR Fee
This one-time charge covers the cost of registering the security interest on the vehicle on the Personal Property Securities Register (PPSR). PPSR is a national database maintained by the Australian government, where lenders record their security interests in personal property, including motor vehicles.
This fee is specific to secured car loans where the vehicle purchased is used as collateral, as this helps ensure the car isn't already used as collateral for another loan or subject to unresolved disputes. This step helps protect both your and the lender's interests, especially if you're buying a used car.
The PPSR fee will typically cost you around $5 for each registration, which is the government's standard cost. However, lenders may charge slightly more or waive it altogether and bake it into the establishment fee instead.
Redraw Fee
Like home loans with a redraw facility, you may be required to pay this fee whenever you access extra repayments you've made on your car loan. However, car loans with redraw features are rare in the Australian market compared to mortgages.
The redraw fee varies per lender and usually ranges from $20 to $50 per transaction.
Early Repayment Fee
The early repayment fee may apply if a borrower repays their car loan in full before the agreed loan term ends. For instance, if you have a car loan with a five-year term and decide to pay it off completely in the third year, the lender may charge this to offset the interest revenue they will lose out on future repayments. This fee is common with fixed rate car loans.
Depending on the lender, the early repayment fee can be a fixed charge (i.e., a few hundred dollars) or a percentage of the remaining balance (e.g., 2% of the outstanding amount).
That said, make sure that the interest savings you could potentially realise from paying off your car loan early is greater than the fee you may be required to pay. Better yet, if you anticipate repaying early, consider a variable rate car loan or one with flexible repayment terms.
Late Payment Fee
This fee is charged by the lender when a borrower fails to make a scheduled loan repayment by the agreed due date. It serves as a penalty and is designed to encourage timely payments. The late payment fee is typically added to your next repayment.
The amount can vary widely depending on the lender and the terms of the loan. Lenders in Australia often charge between $10 and $35 per late payment. Make sure to meet your repayment obligations on time to avoid these charges.
What is Balloon Payment?
A balloon payment is a large, one-time lump sum that you agreed to pay to the lender at the end of your car loan term in exchange for lower monthly repayments. The amount is typically pre-determined during the loan negotiations and is expressed as a percentage of the car's purchase price or the total loan amount, which tends to be around 30-50%.
For instance, a car loan for $30,000 with a 30% balloon payment would require a $9,000 lump sum at the end of the loan term.
Pros of balloon payment
This type of loan structure is ideal if you want to improve affordability during the loan term and take advantage of flexibility at term-end. Depending on your agreement with the lender, you can either pay off the lump sum at the end of the loan as agreed, refinance the balloon amount into a new loan, or sell the car and use the proceeds to cover the balloon payment.
Cons of balloon payment
Aside from the most obvious disadvantage which is the large lump sum that can be challenging to pay down, opting for balloon payment can result in higher total loan cost. Lenders typically charge interest on the entire loan amount, including the deferred balloon payment, meaning interest accrues on the full balance until the loan term ends.
See below how much a car loan with a balloon payment structure will cost you.
| Car loan with balloon payment | Car loan without balloon payment | |
|---|---|---|
| Loan amount | $30,000 | $30,000 |
| Interest rate | 6% | 6% |
| Loan term | 5 years | 5 years |
| Monthly repayment | $405.99 | $579.98 |
| Balloon payment | $9,000 | $0 |
| Total loan cost | $33,359.33 | $34,799.04 |
In a standard car loan without a balloon payment, the loan balance reduces more quickly with monthly repayment, thus interest charged also decreases over time. In contrast, a balloon loan maintains a larger principal balance for most of the term, meaning more interest accrues overall.
How to Minimise Car Loan Fees
Compare car loans
Always check the comparison rate to assess whether the loan is riddled with hefty fees. Reputable comparison sites can help you when shopping around for a car loan.
Additionally, thoroughly evaluate whether a low or no-fee loan offer will cost you less or more down the track.
Let's look at these two $15,000 car loans on a five-year term.
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Car loan A has no upfront or ongoing fees and carries an interest rate of 8%.
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Car loan B has an establishment fee of $300 plus an ongoing fee of $5 monthly. It carries an interest rate of 6%.
By taking car loan A, your monthly repayment will be $304 and cost you $18,240 in total with interest charged. Meanwhile, car loan B will result in monthly repayments of $290 and a total loan cost of $18,000 with the fees included. You'll save $240 by opting for a loan with fees but a lower interest rate.
See: InfoChoice Car Loan Calculator
Use a loan calculator to compare your options. And, if you do find a loan with a low rate and low to no fees, you've got yourself a winner!
Make extra repayments strategically
Paying more than the minimum required repayment amount on your car loan can help you pay it off earlier and save you on interest charges. However, you have to do it right.
Best to choose a car loan that allows flexible repayments without extra or early repayment fees. This ensures that every dollar you pay goes directly toward reducing your loan balance and does not cost you more over time or get eaten up by penalties.
Be smart if you opt to make a balloon payment
Choosing to make a balloon payment on your car loan can significantly lower your monthly repayments. However, unless you have a clear plan to manage the large lump sum you need to pay at the end, you might be better off going for a standard car financing option.
Maintain a good credit score
Paying your debts and bills on time and keeping credit card balances low will do you a lot of good when applying for car financing. A good credit score allows you to qualify for loans with lower interest rates and fees.
Read: Advantages of a Good Credit Score
Additionally, borrowers with strong credit are often eligible for special offers, including fee waivers or discounts on application and account-keeping fees. It truly is the gift that keeps on giving!
Always read the fine print
It is exciting to get the keys to the car of your dreams, but before you sign into a car loan, carefully review its terms and conditions. This way, you can identify the fees that may not be prominently advertised but will apply to your loan.
Reading the fine print will also help you spot promotions or fee waivers, and avoid missteps that trigger extra charges. If there's anything you don't understand, ask the lender for clarification.
An earlier version of this article was written by Sharvani Mehrish in July 2019
Header photo by aleksandarlittlewolf on Freepik
In-text photo by katemangostar on Freepik
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