Knowledge is Power
Buying a new car? Excellent. How are you paying for it? Sorting out your finance may be less fun than deciding on the make, model and colour of your new ride, but it is vital. The key is to be researched and prepared. So, consider your financial goals, objectives and current situation, and be clear on the full details of any potential car loan before making an on-the-spot decision. After all, next to a home, it could be one of the biggest purchases you will make.
Ways to Finance a Car
There are many options for financing a car purchase: personal loans, cash payment, leasing, drawing on your home loan or utilising dealer finance directly through the car yard. Each option has its own costs and benefits.
1. Cash
If you have the funds available, purchasing a car with cash means you can avoid any finance and interest charges.
However, this may mean dipping into cash reserves that you may want to retain for ‘a rainy day’. Despite having the funds available for a car purchase, your priority may be having cash liquidity at hand in a savings account or transactional account.
2. Personal Car Loan
If you purchase that $30,000 car via a loan with an interest rate of 7.0% over a 5-year (60-month) period; the total approximate amount that you will repay will be $35,642. This is an extra $5,642 on top of the principal amount of $30,000 plus any other fees and charges on the loan.
Some of the benefits of a personal car loan provided directly by a credit provider could include:
- The ability to purchase any car (however the age or 'new/used' classification of the car will generally change the types of loans and interest rates available)
- You generally have more freedom to purchase a car you want even if you don’t have the cash to purchase outright
- You can purchase new or used, from a private seller or car yard without using cash you have worked hard to save for another purpose or a rainy day
- Depending on the product, your loan may have no ongoing fees and no fees for early repayments.
Of course, as with all loans, you are required to make regular repayments and otherwise comply with the terms and conditions of the loan.
3. Manufacturer Finance
Vehicle manufacturers often have special offers, such as 0%p.a. interest for buyers looking for a new car. These lower rate deals often have strict eligibility criteria and are generally only available on a vehicle purchased at the drive away price meaning that you cannot negotiate a discount on the purchase price. Further, there may be extra fees payable.
Some of these offers (and some other car and personal finance products) are based on having a 'balloon payment', also called a ‘residual payment’. This is a lump sum repayment of the outstanding principal made at the end of the loan term in return for making lower repayments over the loan term.
4. Dealer Finance
Most car dealers offer finance options when purchasing cars from their lot, usually through third-party credit brokers and companies. In some instances, dealers might offer low interest rates, but, as in the case of the manufacturer’s finance, it is worth investigating whether there are fees, charges or other loan restrictions or conditions which could offset the benefit you might have received from the low interest rate. To obtain finance you will need to buy a vehicle from the particular dealer, limiting your ability to shop around and offers may only apply to certain makes and models of new cars, and more.
5. Home Loan Redraw or Equity Loan
If you are a homeowner with a mortgage that comes with a redraw facility you could redraw funds to purchase a car. A redraw facility lets you pay more into your home loan account than the scheduled repayments, then redraw funds from that surplus for other uses. For example, if your home loan repayments are $1000 per month and you are paying $2000 per month, then the redraw amount after 10 months would be $10,000, which you could then use to fund or part-fund a car purchase. Using redraw facilities can be a good option because the interest rate on a home loan is usually lower than the interest rate on a personal loan.
Alternatively, if you have accumulated equity in your home, thanks to paying down your loan and/or an increase in the value of your property, then you may be able to access that equity to buy a car by refinancing your home loan. You can find out more about unlocking your equity or by speaking with an IMB specialist in your nearest branch or on 133 462.
Ultimately, it’s a matter of doing the numbers, weighing the various options and considering matters such as the following questions:
- What’s the best deal?
- How much will I pay in total?
- Which option works best for my financial situation?
How Car Loans Work
What is a Car Loan?
Simply, it’s what it says on the tin: a car loan is a personal loan used for the purchase of a motor vehicle – car, motorcycle, ute or another road vehicle. There are a range of options available, with loan features and costs which depend on your financial situation, whether the vehicle is a new or a used car, whether you want to equip your ride with custom extras, which institution you choose to go through for the loan, and more.
Car Loan Vs Personal loan
Personal loan funds can often be used to purchase a car. There are different pros and cons of buying a car with a personal loan or a specific car loan.
Car Loan
Car loan interest rates may sometimes be lower than personal loans, especially if the car is new – or relatively new – and is used to secure the loan (see more on this below).
However, car loans are specifically for the car purchase and may not used for other purposes so you cannot use a car loan to purchase a car and other goods or services or consolidate existing loans.
Personal Loan
An advantage of an unsecured personal loan is that you can spend it in the manner you choose: car purchase, musical instruments, holidays, debt consolidation etc. That flexibility may come at a cost: unsecured personal loans usually have a higher interest rate than those secured by a motor vehicle.
Secured Loans vs Unsecured Loans
How does a secured car loan work?
Similar to providing a mortgage over a property as security for a home loan, a secured loan requires you to provide the lender with security over the car. If you are unable to pay your loan, then the lender has the option to sell your car to recover some, or all, of the remaining loan amount.
At IMB, you can take advantage of secured loan rates for cars that are up to 6 years old and our New Car Loan rates if the car is less than 4 years old. These rates recognise the value of the assets, their depreciation and a range of other factors.
How does an unsecured car loan work?
Unsecured loans are assessed purely on the applicant’s ability to repay the loan, as there is no asset to secure the loan (hence the label ‘unsecured’). As mentioned above, this means that interest rates are typically higher to offset the risk to the lender.
IMB offers an unsecured personal loan for purchases of cars that are over 6 years old.
Used Car vs New Car Loans
The major difference between the types of loans available for new cars and used cars is the value of the asset (car) that can potentially secure the loan. Usually, the more valuable the asset, the better rate of interest available.
New Car Loan
Unless it’s a collectible classic, a car is rarely more valuable than when it rolls off the lot. Therefore, this type of secured car loan will generally have lower interest rates. IMB’s New Car Loan is available for both brand new car purchases and for vehicles up to 4 years old.
Tip: Buying a car that is 12-24 months old may be a way to secure a good deal. New cars can depreciate quickly. You could pick up an excellent deal on a vehicle less than two years old that might have low kilometres and still be under warranty.
Used Car Loans
Used cars fall into two categories: cars that are able to secure a loan due to their value (usually because of how ‘young’ they are) and those that are not assessed for security purposes (typically older cars).
Secured Used Car Loan
At IMB, cars that are between 4 and 6 years old may qualify for a Secured Personal Loan. his is similar to a new car loan in that the asset – or car – secures the loan. The interest rate is usually lower than an unsecured personal loan.
Unsecured Used Car Loan
For vehicles that are over 6 years old, IMB’s Unsecured Personal Loan ffers competitive rates without using the car as security. One advantage of an Unsecured Personal Loan is that, depending on your circumstances and what you want to spend, you may be able to borrow enough to buy the car and add some personal touches, like a new paint job, seat covers, engine modifications and so on. For more information, call 133 462 to speak with a member of the IMB team.
How long are car loan terms?
Depending on whether the loan is secured or unsecured, the amount of the loan, and the level of repayments you are comfortable with, New Car Loans terms are generally from 1 to 7 years. Used Car Loans and Unsecured Personal Loans are typically for a term of 1 to 5 years.
Are car loan rates fixed or variable?
Some lenders offer variable rates for their car loans, which are subject to interest rate changes and policy decisions by the lender. The rates may go up and they may come down, both of which can affect your repayments
At IMB, our car loans are fixed rate car loans. These provide certainty of repayments over the loan term: you know what you will have to pay over the life of the loan, no matter the market fluctuations. Additionally, IMB car loans offer the flexibility to pay off your car loan as quickly as you like with no early payout penalty. Our car loans also have no monthly fees.
What is the Comparison Rate?
The comparison rate features alongside the advertised rate in all financial products, and includes the advertised interest rate plus any fees and charges that make up the total cost of a loan. Sometimes a lower rate may have a higher comparison rate because of the application fee, monthly charges and so on. For example:
For a $30,000 secured new car loan over a 5-year term:
In the above example, Car Loan A looks like a better deal, but once you include all fees (as demonstrated by the comparison rate), then Car Loan B will actually cost less over the life of the loan.
How do I apply for a Car Loan?
To be considered for a car loan with IMB, you need to be over 18, have a good credit history and a regular monthly income. Then it’s a matter of providing the relevant documents to our team. The process for conditional approval can take as little as 10 minutes. Apply online or phone the IMB team on 133 462.
Documents you will need
At IMB, the documents you need to supply when applying for a car loan or personal loan vary depending on the vehicle you are buying and the finance you are applying for. As a minimum, you’ll need:
All Car/Personal Loans
- Driver’s licence
- Medicare card
- 2 most recent payslips
- An Income Statement or Group Certificate
New Car (you will also need)
- Dealer invoice
- Full Comprehensive Insurance Policy or certificate of currency (All cars purchased through IMB’s secured loans must have full comprehensive insurance).
Used Car (including cars less than 4 years old)
- Dealer invoice or registration papers
- Full Comprehensive Insurance Policy or certificate of currency
Car Loans for Students?
As a bank headquartered in the same city as one of the world’s best universities (Go UOW!) IMB is proud to provide car loans for students, provided you can meet the above criteria and are a permanent resident. You can contact our Team through Facebook Messenger or simply give us a call for more details.
How much will my car loan repayments be?
MB’s car loan calculators make understanding your estimated repayments and the total amount payable over the life of the loan easy. They even show you how much money and time you may save if you increase your repayments beyond the minimum. IMB Bank's car loan repayment calculator is simple and take less than 5 minutes to complete.
What are the Hidden Costs of Buying a New Car?
A large part of the car shopping process involves hunting for the lowest possible sticker price, but there may be additional costs to consider. Some of the hidden expenses can include:
Registration fees: Before you purchase a new car, it's registered as someone else's property - usually the dealer offering it up for sale. There are fees you have to pay before transferring the ownership to yourself and they vary between each state and territory.
Stamp duties: State and territory governments in Australia have the right to levy stamp duty on the purchase price of any vehicle you purchase. The cost of stamp duty will generally depend on the purchase price of your car and which state or territory you purchase it in. For vehicle stamp duty in NSW go here; for details of stamp duty in other states and territories, go here.
Insurance premiums: In New South Wales, you're required to purchase Compulsory Third Party Insurance (CTP) to protect yourself from costs arising from injury or death to other people in an accident. The NSW Government has a handy comparison site to check before purchasing your CTP insurance. Additionally, you should consider purchasing other optional insurance products to cover you for damage to your vehicle or another third party’s vehicle.
Maintenance: All cars require regular servicing to keep them healthy. If you are buying a new car, then you will likely need to have it serviced by an approved mechanic at regular intervals in order to keep the warranty valid for its entire term. The frequency of car servicing varies among manufacturers, depending on the model, a service could cost several hundreds of dollars.
When shopping for a new car, consider looking at the different extras on offer. Manufacturers and dealers often have a range of sweeteners to attract buyers: cashback offers, loaded extras, extended warranties and, yes, free servicing. It is always worth asking a dealer about extras when negotiating the purchase price.
How should you adjust?
It's possible that, after you've added up the whole cost of purchasing and maintaining various vehicles, you need to reconsider you budget or choice of vehicle. As you comparison-shop the car market, looking for the best deals, consider comparing the other costs as well. You may decide that it makes more sense to use the "drive away" price of a car for your calculations rather than the manufacturer's list price for your calculations, as the “drive away” price includes dealer delivery costs, stamp duty, registration, compulsory insurance and any chosen extras.
Consider all the options as you go about making your purchasing decision: various types of cars, dealerships and regions around Australia.. You never know where you might find an option that ultimately works out best for your finances.
First time buying a car? For an interactive exploration of the buying, maintaining and general costs of running a car once you have bought it, go here.
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