Six things to consider when comparing car loans

If you’re not sure, take heart: we’ve assembled the six things that you should keep in mind when comparing car loans?

All car loans are basically the same, right? Wrong. There are countless options if you’re looking for a car loan, so it’s important that you know how to choose a product that matches your circumstances.

Are you receiving a competitive interest rate?

Car loans are available with both fixed and variable interest rates. A fixed rate is consistent over the lifetime of the loan, which means that you can budget in advance and avoid having to worry about any unexpected rate increase. A variable interest rate might be lower, to begin with, but can fluctuate due to changes in the market—in other words, you could end up paying more money over time. Either way, you should shop around to ensure that you’ve been offered a competitive interest rate. Keep in mind that, with RateSetter, your borrowing request will always be matched to the lowest available interest rate on our lending platform.

What will the monthly repayments be?

The monthly repayment for your car loan will usually involve two main components: a sum equivalent to a portion of the loan principal (i.e. how much you initially borrowed), and interest on your loan. When you apply for a car loan, the finance provider will provide you with a loan schedule that sets out what your monthly repayments will be. It’s imperative that you carefully consider whether or not you will be able to afford the monthly repayments. Failure to do so punctually could lead to unexpected late payment fees and have a negative impact on your credit score.

What will be the total cost of the loan?

On paper, it can be hard to distinguish between a short-term loan with high monthly repayments and a long-term loan with lower monthly repayments. Certainly, you may decide that lower repayments offer a more manageable option—but does that mean you’ll end up paying more in the end? The only way to know for sure is to calculate the total cost of the loan. Of course, if your loan has a variable interest rate, you might only be able to arrive at an estimated amount. You can then consider whether this meets your needs.

Does the loan offer you a degree of flexibility?

The general rule with loans is that the quicker you can repay your debt, the less the loan will cost you overall. This is because paying down your loan fast will reduce your exposure to interest rates, allowing you to save on overall interest charges. The catch is that some loan providers will prohibit you from making early repayments, or penalise you for doing so (for example, by applying fees). This can prevent you from using spare cash, such as a sudden windfall, to pay down your loan and minimise the amount of interest you’re required to pay.

Will the loan be secured or unsecured?

Ordinarily, car loans are secured—that is, to qualify for a car loan, you’re required to provide collateral that the loan provider can repossess if you default on your loan. This provides added security to the lending organisation and might allow you to access a slightly lower interest rate. In most cases, the car you purchase with the borrowed funds is itself used as collateral.

However, not all car loans are secured: it’s also possible to use an unsecured personal loan to purchase a vehicle. The advantage of this approach is that it grants you greater flexibility in terms of how you use the funds available to you. For example, you can choose to buy a second-hand vehicle (these are usually not accepted as collateral) or use your funds to cover related costs, such as registration and insurance.

Are you paying for any add-ons and, if so, do you really need them?

Car loan providers may offer you various add-ons to your car loan These add-ons might include:

  • Loan protection insurance, to cover some or all of your loan repayments if you’re unable to work in certain circumstances such as injury, illness, or involuntary unemployment;
  • Gap cover, to cover part or all of the gap between the value of your vehicle and the outstanding amount on your loan, for example, if the vehicle is stolen, written off, or damaged beyond repair; and
  • Extended warranties, which insure the vehicle itself (not the loan) for a set period (e.g. two years) or up to a certain limit (e.g. 200,000 kilometres)

If there are any add-ons associated with your car loan, you should consider very carefully whether or not you need them. Always check the terms and conditions associated with the add-ons and, if you do decide to purchase one, shop around to make sure you’re getting the best possible value for money.

This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.