If you’re planning to buy a new or used car, understanding how car loan interest works can help you compare your finance options and estimate the overall cost of borrowing.
For many Australians, purchasing a vehicle is one of the largest financial commitments they’ll make. Before applying for a vehicle loan, it’s worth taking the time to understand how interest rates work and the factors that may affect your repayments.
Understanding Your Car Loan Interest Rate
Your car loan interest rate plays a big role in determining how much you will end up paying in total for your vehicle.
Essentially, an interest rate is what a lender charges you for a loan to buy a car. A percentage of the loan amount is then paid on the amount that you borrow, which is not necessarily the same as the total purchase price.
In your search for a car loan, you’ll come across two types of interest rates:
Fixed Rate
This is locked in at the time of purchase and remains the same for the duration of the term (the period over which you pay the money and interest back). This is the most common type of loan for vehicles and gives you some security as it doesn’t fluctuate so you’ll still be paying the same amount of interest that you signed up for.
Variable Rate
With a variable interest rate, the rate may increase or decrease over the life of the loan, meaning your repayments or the amount of interest you pay could change. Some variable-rate loans may also offer additional repayment flexibility, although features vary between lenders.
What also makes a good interest rate depends on a number of factors like the lender you choose, your financial status, the age of the car you’re looking at buying and your credit history. It’s also important to remember that interest rate is just one key component of a car loan and there are other factors to think about, such as:
- Upfront and ongoing fees
- The amount you’re borrowing
- The deposit on the car
- The length of the car loan
Factors That Affect Your Interest Rate
Let’s dive into the factors that may affect the interest rate you can get on your car loan.
Credit Score
Your credit history is one of several factors lenders may consider when assessing a loan application. Depending on the lender, it may influence the loan product or interest rate you’re offered, but it isn’t the only factor considered.
There’s often a misconception that once your credit history has defaulted, getting a personal or car loan or used car loan approved is impossible – this isn’t always the case. If you’re concerned about your credit history, it may be worthwhile reviewing your credit report before applying and correcting any errors where appropriate.
Find out more about applying for a car loan with Rapid Loans.
Deposit
With some lenders, the more you put down, the lower the rate you may get because there is less risk for the lender. On the flip side, a smaller deposit may incur a higher interest rate due to the risk of default on a larger loan amount.
Secured vs Unsecured Car Loans
Secured car loans use an asset (usually the vehicle you’re buying) as security against the loan. This means that if you default on the loan, the lender may repossess your car to use as collateral.
With unsecured car loans, the lender doesn’t have collateral to fall back on so they tend to offer higher interest rates as they’re under more risk if you miss your repayments. Rapid Loans offers secured vehicle loans.
New or Used Cars
The age of the car you’re buying can also impact your interest rate as newer cars may attract a higher product tier with some lenders, meaning you could be offered lower interest rates, while older cars may come with higher rates. The loan amount for a new car is also usually higher, which may impact the loan product you are offered.
Loan Term
Choosing a shorter loan term generally means less interest accrues over time, although your regular repayments may be higher. A longer loan term can reduce your regular repayment amount but may increase the total interest paid over the life of the loan.
Calculating Car Loan Interest
Your regular loan repayments generally include both the amount you borrowed (the principal) and the interest charged by the lender.
While there are mathematical formulas for calculating loan interest, many lenders provide online repayment calculators that can help you estimate your repayments based on the loan amount, interest rate and loan term. These tools can be useful when comparing different borrowing scenarios, although they’re only estimates.
Before accepting any loan, take the time to read your loan contract carefully so you understand the interest rate, repayment schedule, fees and charges that apply.
Understanding Your Vehicle Loan
Understanding how interest rates work is just one part of choosing a vehicle loan. Comparing loan features, fees, repayment options and the total cost of borrowing can help you make a more informed decision.
Rapid Loans offers secured vehicle loans from $5,000 to $45,000, subject to our credit eligibility criteria and approval requirements. If you’re considering finance, our team can explain the application process and loan features so you can decide whether a vehicle loan is right for your circumstances.
This article is general information only and does not constitute financial or credit advice. It does not take into account your personal objectives, financial situation or needs. When you apply for a loan with Rapid Loans, your application will be assessed against our credit eligibility criteria. All applications are subject to approval. Terms and conditions, fees and charges apply.