How to compare car loans?

When it comes to getting a car loan, understanding your options and shopping around can save you big bucks in the long run.

Taking a few minutes to compare loans can also help you avoid getting finance through the dealership, which can often come at a high interest rate.

This guide covers the essentials of comparing car loans and what you need to know.

In Australia, about 90% of car purchases involve some form of financing*.

There’s a good chance you’ve already taken out a loan in the past to pay for a new or second hand vehicle.

The good news is that there’s a number of new lenders entering the car loan market and that means there’s more choice than ever before.

But with more choice comes more complexity, and it can be a bit hard to know whether you’re taking out a good deal or not.

So, how do you choose between all the different options out there?

And how do you know which car loan is right for your financial situation?

Here’s what to look out for when comparing car loans.

We’ll start with the basics.

How do car loans work in Australia?

A car loan is a type of personal loan you use to buy ​​a vehicle like a car, 4WD, ute or motorbike.

If you don’t have enough savings to buy a vehicle outright, you can use a car loan to pay for some or all of the cost.

Car loans can be either secured or unsecured.

With a secured car loan, you’ll need to provide information about the car you want to buy as this will be used as security if you can’t pay back the loan.

With an unsecured car loan, the lender doesn't use the car or any other assets as security for the loan.

Secured car loans usually - but not always - come with lower interest rates than unsecured car loans.

You can either get pre-approval for a loan before you go to the dealership, or you can take out finance when you arrive at the dealership.

Here’s how the process for getting a car loan typically goes:

• You either see a car you like at the dealership or research online the car you want to get a rough price.

• You fill in an application for the loan.

• The lender reviews your application and runs a credit check to decide if you can pay back the loan.

• If your application is approved, the lender agrees to lend you a certain amount to buy a vehicle.

• For a secured loan, the lender pays the vendor (whoever is selling the car, usually a dealership) the amount you borrowed.

• For an unsecured loan, the lender transfers the money to you and you pay the vendor.

• You pay the money back to the lender, usually in regular repayments over several years.

Keep in mind there are several types of car loans on the market and some work slightly differently to the process above.

It’s why comparing car loans can help you get a better handle on what’s available and how much it will cost you.

What is the best car loan in Australia?

There’s no one-size-fits-all car loan out there, but finding a loan that fits your finances depends on a few different things, such as:

• How much you want to borrow. Different lenders may offer you different loan amounts.

• Whether you plan to buy a new or used vehicle. For example, some lenders only offer loans for cars up to a certain age.

• Your preferred repayments structure. Including how often you want to make repayments and whether you want the option to make extra repayments or pay off your loan early.

There are two interest rate types on car loans: fixed or variable.

Although fixed interest rates are more common, some lenders offer a variable rate option as well.

With a fixed interest rate, you lock in one interest rate for the entire loan period.

That means your repayments should stay the same until you’ve paid off the loan.

A variable interest rate can change depending on the current interest rate.

Your repayments could go up if the interest rate rises, or they could go down if the rate drops.

What is a good finance rate for a car loan?

There are lots of factors that can impact car loan rates, including market fluctuations, your credit score, your financial situation and the car you want to finance.

The lowest loan rate on Compare Club’s panel is currently 6.59%**.

This is subject to change as lenders change their rates frequently and not everyone will be eligible for this rate.

What is the average car loan rate in Australia?

Instead of looking at the average car loan rate, looking for a competitive loan that's good value for your budget and the car you want is a better idea instead of benchmarking against an average.

Everyone’s financial situations are different, which means different rates can be applied across the board and makes it harder to find an “average” rate.

By comparing loans before you step into the dealership, you have a reference point for what's competitive and what you can afford.

For example, the difference between a 5 year $35,493 loan at a rate of 9.81% and 7.35% is $492 a year.

Or $2,460 over the lifetime of the loan***. And the numbers above aren't random.

We also help people refinance their car loans.

At the time of writing (November 2021), 9.81% is the average rate people are paying when they ask us for help, $35,493 is the average cost of the loan and our best average loan match is 7.35%.

We know it can get a little confusing. That's why our experts are on hand to help.

They do all the hard work and maths so you don't have to.

Is it better to get a car loan from your bank or dealership?

What’s best for you when it comes to financing will depend on your personal circumstances.

Some banks or financial institutions will offer better rates, one dealership might offer no exit fees and some car loans come with harsh penalties for not making repayments.

It pays to do your research and consider all your options before committing as picking one type of lender over the other could save you time and money.

What are the alternatives to banks or dealerships for a car loan?

There are a range of online car loan providers available if you don’t want to go with your bank or a dealership.

These online lenders may offer lower rates and better features than going through a traditional bank or your dealer, but since there’s quite a few of them, it can be hard to know which car loan provider is right for you.

By quickly and easily comparing car loans with Compare Club, you can easily see the difference in rates from different lenders and potentially save hundreds in the process.

What are the disadvantages of getting a car loan?

Some of the potential disadvantages of getting a car loan include:

• You’ll have to pay interest on the loan, increasing the total cost of the vehicle. Finding a good deal on a car loan can help minimise the amount of interest you pay.

• If you have a secured car loan, your lender can repossess your vehicle if you can’t afford to pay back the loan.

• Your lender might have restrictions on the types of cars they offer car loans for, such as older cars or sports cars.

• With some lenders, there are also high exit fees if you repay the loan early or make additional repayments outside of your weekly, fortnightly or monthly repayments.

Can I get a car loan on a second-hand vehicle?

Yes, many lenders offer car loans for used vehicles.

Some will only offer car loans for vehicles up to a certain age, while others have specific car loan products available for second-hand cars.

Are there different ways to pay back a car loan?

Most lenders provide the option to pay back a car loan in either weekly, fortnightly or monthly repayments.

Aside from that, there are a few other repayment options to consider when shopping for a car loan:

• Balloon payments. You agree to pay a lump sum at the end of the loan term, reducing your regular repayments.

• Extra repayments. Some lenders will allow you to make extra repayments if you want to pay off your loan faster.

• Early exit. If you want the option to pay off your loan in full early, keep an eye out for early exit fees in the fine print.

Can I switch my car loan provider?

Yes, you can switch your car loan provider to get a better deal and/or better features elsewhere.

Typically you need to be meeting your current car loan repayments to be considered for refinancing, but Compare Club can help you find the right car loan for your financial circumstances.

It’s also important to check whether there are any early exit fees for leaving your current provider, as this can impact how much you’ll save by switching.

Does applying for a car loan affect your credit score?

When you apply for a car loan, the lender will run a credit check as part of the application process.

This can affect your credit score positively if you’re approved, or negatively if you’re denied.

Comparing car loans through Compare Club won’t affect your credit score.

To provide you with initial quotes, we do what’s called a ‘soft credit check’.

This will appear on your credit history but won’t impact your score.

A vehicle is a big purchase, so it makes sense to shop around for a lender that offers the best deal for your circumstances.

With Compare Club, you can compare essential info side-by-side and get loan options in as little as 60 seconds.

We find you the most suitable lenders while minimising risk to your credit score.

Ready to get started?

Click below to compare car loans quickly and easily.

This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.

Compare Club has partnered with CarClarity, Australian Credit License 478 874.

CarClarity has commercial relationships with over 30 car finance lenders & has access to over 1000 car finance plans, however, does not compare all car finance offers in market. Availability of lenders and products can vary dependent on the individual’s personal credit history and circumstances. CarClarity & Compare Club may receive a commission from the lender to provide this service.

*Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry, Some features of car financing in Australia, accessed 29th November 2021

**Figures are accurate as of 24th August, 2022.

***Savings based on customers that refinanced and gave us the rate on their existing loan. We also assumed like-for-like terms and loan amounts for direct comparison based on their current application.