Car Loan Comparison Rate, Examples and Lenders in Australia

Shopping around for car loans isn't the most straightforward job in the world. Most of us take a look at the interest rate and try to drive it as low as we can. There is no denying that lower interest rates result in cheaper loans. However, there are many more factors to consider, such as the other fees, whether to opt for a fixed rate or variable interest rate, a secured car loan or unsecured, and the loan term.

This is why we use the comparison rate. Do you want a more transparent, more informative way to compare car loans? We'll explain the comparison rate and how to use it to make the best car loan decision.

What Is a Car Loan Comparison Rate?

A car loan comparison rate is one figure expressing the overall cost of the vehicle. Instead of looking at interest rates and fees and charges separately, the comparison rate rolls it all into one number. Lenders express comparison rates as a percentage per annum. It gives you a clearer view of how much the loan really costs.

The interest rate only tells you one aspect of the loan's actual cost. Many lenders might even pile on expensive charges on low-interest loans to get their money back. The lower interest attracts customers, but the higher costs ensure the lender doesn't lose out. Of course, a low-interest rate is typically reasonable. But just looking at the interest rate can be misleading.

Whereas, the comparison rate includes most loan-related expenses upfront. It's an excellent way to calculate your budget for the most accurate estimate of your monthly repayments and other costs.

What Is a Comparison Rate Example?

Lenders use a standard formula to calculate the comparison rate. Therefore, you can compare two or more loans side by side - even from different lenders. You'll get the complete picture of how much the loan will cost you. You can calculate your monthly repayments using a car loan calculator once you have a comparison rate, loan term, and loan amount.

The calculator will give you a rough idea of how much you can expect to pay each month. Remember that it's not 100% true to the final loan agreement. With these approximate figures, you can determine whether the loan is within your budget.

Let's take a look at an example. The borrower wants a $20,000 car loan with a loan term of five years.

Loan A has:

•  Interest rate of 7.45% p.a.
• Fees and charges of 0.5% p.a.
• Comparison rate of 7.95% p.a.
• Monthly repayment of $405.05

Loan B has:

• Interest rate of 6.95% p.a.
• Fees and charges of 1.75% p.a.
• Comparison rate of 8.7% p.a.
• Monthly repayment of $412.26

We can see that while loan B looks more attractive with its lower interest rate, it actually costs $7.21 more per month. Over five years, this is an extra $432.60. Loan A is more competitive when we look at the comparison rate rather than the interest rate.

Although, bear in mind that the comparison rate doesn't always account for loan terms, principal amounts, or include other facilities (e.g. a balloon payment). We'll cover what else the comparison rate excludes later. When comparing loans, make sure the loan terms and amounts are the same to get an accurate idea.

Why Are Loan Comparison Rates Useful?

A comparison rate will offer a like-for-like analysis of each car loan product. With our example above, you can see that looking at car loan interest rates on their own does not give a clear idea of ongoing costs or additional fees. Here is why looking at car loan comparison rates is useful.

1. True Cost: We've already seen how the interest rate doesn't always show exactly how much you'll spend on a loan. Adding up all the fees and charges yourself might get confusing. Fortunately, the comparison rate is a legal requirement for all lenders with an Australian Credit Licence.
2. Save Time: As we said, calculating each part of the loan is fiddly. You might miss a charge or get lost in your calculations. The comparison rate has already done the work for you. When you shortlist your loans, simply detail the comparison rate next to each, and you'll know the best loan choice at a glance.
3. Save Money: If you only compare car loans by looking at the interest rate, you might miss various fees and charges. Use the comparison rate to avoid any hidden costs. It will help you save money and prevent additional ongoing fees.

Why Should You Look at Comparison Rates When Budgeting?

If you do not look at the comparison rate, budgeting would be like blindly flying a plane. The interest rate only tells you so much about the true cost of the loan. Let's go back to the above example. Say you opted for Loan B. When you create a budget, you input the interest rate of 6.95% into a loan calculator. This tells you that you'll make a monthly repayment of $396.

As we saw, the true cost of loan B is $412.26 a month when you take into account the fees and charges. If you only budget $396 a month, you'll be $16.26 short every month. While coming up with an extra $16.26 a month might not be a significant stress for some people, it builds up. Over the entire course of the loan, you'll have missed $975.60 out of your budget.

Accordingly, you must check out the comparison rate in your budget.

What Fees Are Not Included in a Comparison Rate?

When comparing loans and comparison rates, bear in mind that they do not include every cost associated with the loan. We've already seen that an extra $16.26 a month can make a significant difference to your budget. Similarly, everything a car loan comparison rate excludes will also have an impact. Here are some of the elements not covered by the comparison rate:

• Government stamp duty
• Car registration fees
• Redraw or repayment fees
• Fee waivers
• Early repayment fees
• Late car loan repayments fees
• Statement requests
• Refinancing fees
• Fees and charges that aren't available when the lender provides the comparison rate
• Various cost savings, such as interest offset arrangements
• Loan term and loan amounts - make sure you compare car loans with the same term and principal amount

We don't mean to suggest that the comparison rate is not an extremely valuable tool. However, it's worth keeping an eye on these additional costs and potential fees.

Stamp duty, for example, differs from state to state. It's usually calculated as a percentage of the car's purchase price and can be as high as $6 for every $100 spent. Cheaper, lower-emission cars tend to have lower stamp duty rates. Even so, it's a significant sum to include in your budget. Although, your car dealer might have included stamp duty in the car's purchase price.

How Do Lenders Calculate the Comparison Rate?

The comparison rate is always higher than the advertised interest rates as they include additional fees and charges. Three main categories are taken into consideration to calculate the comparison rate. These include upfront fees, ongoing fees, and discharge fees.

Upfront fees include:

• Car loan application fee
• Documentation preparation fee
• Loan establishment fees

Ongoing fees could include:

• Monthly account fee
• Annual package fee
• Periodical admin fee
• Potential redraw fees
• Potential extra repayment fees

Discharge fees at the end of the loan include:

• Discharge admin fee
• Documentation preparation fee
• Early repayment fees if you've made extra repayments to end your loan early

Lenders calculate comparison rates uniformly, using a standard formula to ensure it is the same across the market. Lenders add up all the above fees and interest repayments (based on an unchanging car loan amount and loan term) and express the total cost as a percentage.

The main takeaway is to remember that car finance with a low advertised interest rate is not necessarily the best deal.

Other Ways to Compare Car Loan Deals to Find a Suitable Product?

As the car loan comparison rate doesn't cover every aspect of loan costs, you might wish to find other ways to compare loans. We recommend that you assess these additional factors alongside the comparison rate.

For example, when comparing car loans with the comparison rate, you should also consider your repayment frequency and minimum monthly payments. A loan with higher ongoing costs might not bother you if you're able to pay it off early, thus avoiding additional interest.

Fees and charges

The comparison rate includes fees and charges alongside the interest rate. However, you might also want to check out what expenses you will be paying separately. To find out, look online at your loan options. The lender will detail the comparison rate, minimum repayments, and total interest. The extra fees may not be highlighted as obviously - see if there is a button for more details.

Here, it should list the extra upfront fees you can expect to pay, for example, the establishment fee or a loan service fee. It might also let you know whether it has any ongoing or early repayment fees. All the costs should be displayed readily.

If you're unsure about what you might owe, speak directly to the lender. Moreover, a car loan broker can break down your costs and advise you on how to make the best possible savings.

Fixed or Variable Interest rate

While we have suggested that looking at the comparison rate will give you a better idea of the true cost of the car loan, you shouldn't disregard interest rates altogether. Most lenders offer the choice of a fixed-rate loan or variable interest payments.

Firstly, a fixed-rate car loan is when the borrower pays a set amount of interest repayments each month. For instance, the interest rate is set at 6.49%. With a loan amount of $30,000 over five years, you'd pay $587 every month, regardless of the fluctuating cash rate.

Fixed-interest rate loans suit those who like to plan their budget. The borrower can set aside a precise sum with an exact idea of the monthly repayment amount. They also benefit when the cash rate rises. If interest rates rise above 6.49%, the borrower will actually be paying less interest on their loan.

On the flip side, fixed-rate loans often come with extra fees and are harder to refinance or pay off early.

Whereas, variable interest loans fluctuate from month to month. The RBA sets the cash rate on the first Tuesday of every month (except January). Variations usually aren't that extreme. Your credit provider sets their car loan rates based on this figure.

Therefore, the borrower's interest payments will change each month. In some months, it may be higher than the fixed interest rate. In other months, it may be lower. Variable-interest loans tend to be more flexible - you can make extra repayments without incurring early repayment fees.

The comparison rate doesn't take variable or fixed-interest loans into account - it's up to you to determine which credit products suit your financial situation.

Secured or Unsecured Car Loans

The other decision you need to make is whether you opt for a secured or unsecured car loan. This is a significant choice as it affects the interest rates.

A secured loan means that the lender uses your vehicle as collateral. As with a home loan, the lender can recede the house should you default on your repayments. The same is true of secured car loans. If you cannot repay your loan for whatever reason, the lender has a legal right to your vehicle. They would auction it to cover their loss.

Lenders generally prefer secured car loans as they carry less risk. However, not all cars meet the lending criteria. The vehicle has to be worth a particular value throughout the loan term - therefore, used vehicles over seven years are often excluded.

On the other hand, an unsecured loan means that the lender has no access to your car. This type of loan is riskier as there is nothing the lender can fall back on should you stop making repayments. As a result, the interest rates for unsecured car loans are often higher. The main benefit of unsecured car loans is that they're available for any new or used vehicle.

Whether you opt for secured or unsecured car loans depends entirely on your personal circumstances. But, it's worth considering when you look at comparison rates.

Loan Terms

The loan term indicates how long the loan will last. Car loans typically last anywhere from one to seven years. Lenders have different minimum and maximum car loan terms. The longer your loan term, the more interest it will accrue. On the other hand, a longer car loan term usually lowers your monthly repayments.

Many who opt for longer car loans do so to reduce their monthly fees. A $30,000 car loan with 6.49% interest costs $919 a month over three years. However, over seven years, the monthly repayments are only $445. Extending the loan term is a good way of getting your desired car more affordably.

Yet, with the longer loan term, the total interest payable rises from $3,096 to $7,408. Yes, in the short term, you save money. But in the long term, longer car loans are far more expensive.

To compare the impact of the loan term on your repayments try our car loan calculator.

Of course, with a variable car loan, you might be able to make extra repayments over the loan's lifetime and pay it off early.

What Is the Difference Between the Interest Rate and the Comparison Rate?

Interest rates. Every article you read about car loans will mention interest rates. The first thing most buyers look at when car shopping is the interest rate. But what exactly does it mean?

Essentially, when you borrow money from a lender, they will ask you to pay interest on that amount. This is true of all loans, including home loans and personal loans. It's the same as when you deposit money in the bank. They pay you interest for your money.

With car loans, the percentage differs depending on your reliability, the type of loan, and the loan amount. Most car loan interest rates vary between 2.99% and 10% for a secured car loan. Unsecured loans can have interest rates as high as 15%.

Each monthly repayment includes both the principal (the loan amount you borrow to fund your vehicle) and the interest repayments.

As we've already seen, a comparison rate is the interest rate plus any other fees and charges.

When the Cheapest Interest Rate Isn't the Cheapest Loan

Interest rates aren't the bottom line with your car loan. Often, when the marketed interest rate is particularly low, the car loan will come with additional fees. The comparison rate might be higher than other, more favourable loans with higher interest rates but fewer ongoing fees.

How to Get a Lower Interest Rate

While a low-interest rate doesn't guarantee the best car loan deal, you can still save vast amounts of money by negotiating lower rates. Here is how you can get a lower rate on your car loan.

1. Market interest rates: Take the time to compare loans from various lenders. You'll soon get a good idea of available interest rates. This gives you plenty of material to negotiate with your own lender. Or consider switching lenders entirely.
2. Negotiate: If you're eager to stay with your own bank or credit union, then you may need to argue the interest rate. Use your market knowledge as ammunition and threaten to head elsewhere. Even a reduction of 0.5% or less can mean significant savings.
3. Credit history: Those with a higher credit score generally get offered better interest rates. There are many simple things you can do to improve your credit score to ensure you get the best rate. 
4. Secured loan: Secured car loans use the vehicle as collateral and, therefore, offer better interest rates.
5. Package deal: Many banks and lenders offer package deals. This means that if you take out a personal loan or home loan with them, they offer to reduce your interest rates. They might also offer special deals if you have any other credit products, such as a credit card. Even just a transaction account could help.
6. Finance broker: car loan brokers often have a panel of lenders they work with. These established relationships can result in discounted interest rates if they secure you a loan with them. The broker will also act in your best interest and offer personal advice on loan interest and comparison rates.

Ways You Can Reduce Your Monthly Repayments

If you have taken a look at all the comparison rates and cannot find a loan with affordable monthly repayments that suit your needs, you may need to consider other ways to lower the cost of your loan.

Firstly, it might be worth considering whether you need to change your expectations. While you might have your eye on a new car with all the trimmings, if you cannot afford the repayments, you should think about reducing the amount you borrow.

A cheaper car loan will result in less interest, reducing the overall cost as well as the monthly repayment. Simply opting for an older model or cutting back on the trimmings is a sensible way to reduce the loan amount.

Secondly, consider a balloon payment at the end of the loan. You'll significantly reduce each monthly outgoing by paying a lump sum in the last payment. Let's say you borrow $30,000 and leave a $10,000 residual balloon payment at the end of the loan. You'll have the entire loan term to only pay $20,000 plus interest over the whole $20,000.

The downside is that you will have to cover the cost of the $10,000 remaining at the end of the loan. This might involve taking out a new loan or refinancing with your lender. It won't reduce the overall cost of the loan, but it should drastically cut down on each monthly repayment.

The Car Loan Process in Australia

First, you have to shop around and find a car loan with a comparison rate that suits your situation. Next, you need to apply. The steps to get your car financed are as follows:

1. To begin the approval process, you will have to fill out and sign an application form. 
2. Next, you should receive your application pre-approval or conditional approval. This means that you meet the lending requirements in principle. Most lenders offer pre-approval almost immediately after submitting your application.
3. Then, you will need to supply extra documents to support your application. This will include your identification, payslips, evidence of income, and bank statements. You will also need to share details of your chosen vehicle.
4. As long as you still meet all the lender's criteria, you'll be offered final approval. You will then need to sign your loan document. This agreement will detail the loan amount, term, and interest rate.
5. The lender will then release the funds. The money is typically paid directly to the dealer if you have a secured loan. If it's an unsecured loan, you will receive the funds and purchase the car yourself.

Alternatively, with Ausloans we can help you avoid the pain of shopping around. Simply apply with us online and our system will automatically match you with lenders with whom you qualify. 

Final Thoughts

Using the comparison rate when comparing car loans is an excellent way of ensuring cost savings. With indications of the interest rate and fees and charges, you can make a better-informed decision about your loan. Although, it's not an either-or situation between comparison rates and interest. You should look at both.

Moreover, remember to consider what the comparison rate excludes. It won't help you decide between a secured loan or an unsecured car loan. It doesn't include external fees, such as stamp duty. Your car loan decision should consider everything from the comparison rate to budgeting for other expenses.

FAQ

What Is a Good Interest Rate for a Car Loan in Australia?

Car loan interest rates in Australia start as low as 2.99% but depending upon your credit history can be as high as 20%. . Generally speaking, the lower the interest rate, the cheaper your loan is. However, it's worth bearing in mind that the comparison rate reflects the true cost of the loan, including added charges. In some cases, lower interest rates might hide these fees.

Which Bank Car Loan Offers Are Best?

When comparing car loans, you must look at the comparison rate to find the actual cost of the loan. The interest rate indicates certain charges, but the comparison rate details other fees that raise the overall loan price.

Is a 3% Interest Rate Good for a Car Loan?

Some lenders offer interest rates as low as 2.99% for applicants with excellent credit scores. However, it's worth checking the comparison score when you see an incredibly low-interest rate. Low rates can often hide higher costs and expenses elsewhere. For example, a loan with a rate of 3% might have costly ongoing costs and early repayment fees.