What are typical car loan terms?
There are many car loan products available in Australia, whether you are on the hunt for a new set of wheels or a pre-loved model. But, what are typical car loan terms like?
Unfortunately, there isn’t a straightforward answer to that question. Why? Because of how car finance works.
How do car loans work?
Car finance works much the same way as other forms of loans. A lender agrees to lend you money to buy a car. In return, you agree to pay them back the amount plus interest within a certain timeframe (called the loan term).
But then it gets a bit more complicated.
Multiple factors can influence the terms of your car finance agreement, including:
- How much you borrow
- How big your deposit is
- Your credit history
- Your financial situation
- How long the loan term is
- The rate you get charged
- Whether the loan is secured or unsecured
- Whether the loan comes with any features such as a redraw facility or early repayment options
So there’s no one-size-fits-all approach.
What is a typical interest rate on a car loan?
Interest rates are a great example of how this plays out in practice. Your car loan’s interest rate reflects the amount of risk there is to the lender. The less risk you pose, the lower the rate (and vice versa).
So what does a non-risky credit application look like? Generally, it’s when:
- You have a good credit history and are in stable employment – so are less likely to default on your repayments
- You have a big deposit – so need to borrow less money
- The loan is secured – so the lender can sell your car should you default
- You finance a new or nearly-new car – as they have higher residual value than older models
Car loans can also have fixed or variable rates. A fixed-rate car loan is when the interest rate stays the same over the loan’s term. In contrast, a variable-rate can move up or down during the loan’s term.
How long is a car loan term?
A typical car loan term can be anywhere between 12 months and 10 years. As a general rule:
- The shorter the loan term – the higher your monthly repayment but the less you pay in interest overall
- The longer the loan term – the lower your monthly repayment but the more you pay in interest overall
To see how this works, let’s imagine you’re borrowing $20,000 over five years with a 6% annual rate. Your monthly repayments would be $387 and you’d pay $3,220 in interest over the loan’s term.
But opt for a seven-year term, and your monthly repayment would drop to $292. However, you’d pay $4,528 in interest over the life of the loan
This doesn’t mean you should always pick a shorter term. Rather, choose a car loan that you can comfortably repay over a time frame that suits your needs.
What about car loan fees?
Most car loans have fees attached. These depend on the lender and the loan product you go for, but commonly include some combination of:
- Application or establishment fees
- Ongoing annual or monthly fees
- Early repayment fees
- Missed payment fees
It’s important to understand the fees that come with your loan product – as these can impact the overall cost of the loan. A car loan’s comparison rate can help you with this.
What is the best car loan?
As you can see, there isn’t a standard car loan – as everyone’s needs and circumstances are different. So don’t ask ‘What is the cheapest car loan?’ Instead, look for the right loan for you.
This might not necessarily be the one with the lowest rate.
For example, a loan might come with an appealing low rate but sting you with high ongoing fees and early repayment penalties. On the other hand, a car loan with a slightly higher interest rate could cost you less overall if it allows you to make extra repayments and comes with lower fees.
Given that there are hundreds of car loans to choose from, how do you find the best car loan for you?
That’s where an expert broker like National Loans can help.
We’ll identify the best car loan for your situation – and then get you a great rate from our panel of over 30 specialised banks and non-bank lenders.