The average car finance interest rate



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    Interest rates have been in the news a lot in Australia over the past year, with the Reserve Bank raising market rates by more than 3 per cent and more increases forecast. This market increase has affected all finance products, including car finance. Read on to find out everything you need to know about average car finance interest rates in the market after the most recent developments, including answers to FAQs.

    What is the average car finance interest rate?

    This is a moving feast due to the frequency of Reserve Bank interest rate rises recently. Getting an average interest rate is also complicated by the fact that there are so many lenders in the market, and so many different car finance products such as personal car loans, business car loans and unsecured car loans.

    You can find out the lowest rates available for each of the different types of car finance by contacting our experienced team of brokers at National Loans.

    What factors influence car finance interest rates?

    The main factors that affect car finance interest rates are:

    1. whether the finance is secured or unsecured (more on this in the next section).
    2. market interest rates.
    3. whether you take out a fixed or variable interest rate (more on this later).
    4. your credit score (more on this later too).
    5. the type of vehicle you are buying (new car loans tend to have lower interest rates than used car loans, and some lenders will even offer lower rates for electric or hybrid vehicles).
    6. whether or not you can provide a deposit (and if so, how much).
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    What is the difference between secured and unsecured car finance?

    Secured car finance requires you to provide your vehicle as lender security for the loan. This means that the lender can legally repossess your vehicle and sell it if you don’t make your repayments. It lowers the lender’s risk of approving your loan, so you will get a lower interest rate on a secured loan than you will on an unsecured loan (where you don’t have to provide your vehicle or any other asset as security for the loan). When you take out a secured loan, the lender will register their financial interest in it via the Personal Property Securities Register.

    Fixed versus variable rate car finance

    When you take out car finance, you have the option of choosing a fixed or variable interest rate.

    As the name suggests, a fixed interest rate stays the same for the term of your loan, regardless of any changes in market interest rates. Standard car loan terms are between one and seven years. Your repayments will remain the same even if market rates rise or fall. Fixed rate car finance gives you repayment certainty.

    A variable interest rate on the other hand moves up or down based on market interest rate movements. If rates rise (as they have been regularly over the past year) and you have a variable rate car loan, then your interest rate and your repayments will also rise.

    However, if interest rates rise and you have a fixed rate, then you will be better off if rates rise by more than your fixed rate. If they don’t, you will be worse off. Unfortunately, no one knows for sure what interest rates will do. But fixed car finance rates in the market are currently higher than variable rates. This is an indication that lenders expect further interest rate increases.

    How does your credit score affect your car finance interest rate?

    Your credit score is compiled in Australia by credit reporting agencies. Lenders check it when you apply for a loan. If you have a good credit score, you will be eligible for a lower interest rate.

    How to get a low car finance interest rate

    There are some smart strategies you can use to get a low car finance interest rate:

    • Avoid dealer finance
    • Dealer finance is usually expensive because it favours the dealer rather than the buyer.
    • Use the services of an experienced car finance broker
    • Car finance brokers work for car buyers, not car dealers or private car sellers. They strive to get a great deal for car buyers.
    • Check and improve your credit score before you apply
    • You can check your credit score for free before you apply for any finance via agencies like Equifax, Experian and illion. If your credit score isn’t as good as it could be, you can improve it before you apply for car finance by reducing the number of credit cards you have, paying any overdue debts you might have, and ensuring you make all your future repayments on time.
      Be aware though that your credit score won’t improve immediately, it is compiled over time.
    • Use the services of an experienced car finance broker
    • In general, the more deposit you can provide, the more potential to get a lower interest rate.

    Interest rate FAQs

    Why are there two interest rates listed on car finance products?

    When you look at any consumer finance product in Australia, you will see two interest rates. The lower one is the interest rate and the higher one is the comparison rate.

    What is the comparison rate?

    The comparison rate includes the interest rate plus the cost of any loan fees and charges. It therefore shows the total cost of the loan. You should always try and find the car finance product with the lowest comparison rate to get a good deal.

    How much do higher interest rates affect repayments?

    The table below shows the monthly repayment differences of borrowing $30,000 at different comparison  interest rates over a 7-year term. As you can see, even a 1% difference in interest rates can make a big difference to your total car loan repayment amount.
    Interest rate Monthly repayment Total repayment
    5% $424 $35,617
    6% $438 $36,814
    7% $453 $38,034
    8% $468 $39,277
    9% $483 $40,544
    10% $498 $41,835
    It makes financial sense to take all the steps we’ve outlined to get the lowest interest rate than you can.

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