What exactly is a cheap car loan?

When we receive enquiries for vehicle finance the first, and most common, question we receive is how cheap is it? With this in mind, we have put together an article on what makes a car loan cheap and what to look out for when financing your car.

Interest Rate

First and foremost is the interest rate. An interest rate is the amount of interest due per period and is paid as a proportion of the amount borrowed. The higher the interest rate, the more interest you will pay and therefore the more expensive your car loan will be. Interest rates are typically allocated by the lender based on your personal circumstances. Things that can affect your interest rate include; home ownership status, credit history, age of the car you are purchasing and loan to value ratio. Speak with one of our car loan brokers for more information and advice on keeping your interest rate low.

Fees

There can be a plethora of fees when applying for a car loan and these can have a significant impact on the total cost of your loan. Let’s take a look at the potential fees involved and what to look out for.

Lender Establishment Fee

The lender establishment fee is charged by the bank or financial institution your loan is set up with. Establishment fees in Australia typically range from $150 - $400 and are almost always financed into the loan. It goes without saying that the lower the establishment fee, the better.

Ongoing Account Keeping Fee

The ongoing account keeping fee is a fee that can have a significant impact on the total cost of your loan. These fees will vary from $5 per month to $20 per month. A five-year loan with an account keeping fee of $20 per month will increase the cost of the loan by $1,200. As you can see, it pays to look for a loan with a low account keeping fee.

Early Termination Fee

Some lenders will charge you a fee for exiting a loan contract before its maturity. If you don’t intend of paying the loan our early, this fee is of little consequence to you. If you at least want the option to pay out early, it pays to confirm what the early termination fees are. Most lenders will charge a ‘pro rata’ fee that reduces as the maturity date draws nearer. For example, Bank XYZ has an early termination fee of $680. Over a five-year loan, this equates to $11.33 per month remaining on the contract. Therefore, if you terminate the contract with 12 months remaining, your early termination fee will be $135.96.

Other Fees

The above provides a solid outline of the main fees to look out for when applying for auto finance. There are however, some less obvious fees to look out for also. Keep an eye out for direct debit or BPay fees, late payment fees & default fees also.

Loan Structure

The loan structure can have a significant impact on the total cost of your loan. Here is what to look out for.

Loan Term

Whilst a longer term loan (such as seven years) might look appealing on face value, given the repayments will be lower, it is important to note that an extended term will result in your paying more interest over the life of the loan. If you have the capacity to do so, keep loan terms under five years. Somewhere between three to five years is considered the sweet spot.

Balloon Payment

A balloon payment or residual value is a lump sum owed to the financier at the end of the loan term, after all regular repayments have been made. A balloon allows you to repay only part of the principal sum over its term, reducing your monthly repayments in exchange for owing the lender a lump sum at the end of the loan term. Balloons are useful tools to keep repayments down and manage cash flows, however they can also increase the cost of loan. Some lenders will charge an interest rate premium when a balloon payment is applied, increasing the amount of interest you will pay. It is also important to note that plans must be made to deal with the residual value at the loans maturity. Balloons can be refinanced or paid out in full or the vehicle can be traded in when upgrading to a new car.

Cheap Car Loans

At Revolution Finance, we pride ourselves on offering the lowest cost car loans available on the market. We are constantly on the lookout for the best deal for our clients and our number one priority is cheap, affordable financial solutions. Our initial consultation is always free so give us a call today on 1300 882 851 or submit an enquiry online now.