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 with their own costs and benefits. Here are five common payment methods.

1. Cash

If you have the funds available, purchasing a car with cash means you can avoid any finance and interest charges. If the car is $30,000 (including any fees etc) then that is the fixed price of the car.

However, this may be 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 value of the loan 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.

Some of the benefits of a personal car loan provided directly by a credit provider 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

“0% interest!” is sometimes on offer from vehicle manufacturers for buyers looking for a new car. These lower rate deals are often only applicable to the full recommended retail price of the car – and dealer prices can vary. Further, there can be extra fees in the fine print of the contract, such as delivery charges.

Some of these deals impose a balloon payment A lump sum repayment of the outstanding principal made at the end of a loan term. Also called a “residual payment”. at the end of the loan term which, unless you are prepared for it, can come as a financial shock.

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. These conditions can include short-term set interest rates, a residual balloon payment, a limitation on the finance available 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 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. then you may have enough funds prepaid onto your home loan 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. But there are several credit options to financing that purchase, depending on: your financial situation, whether it 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

Most personal loan funds can be used to purchase a car. There are different advantages to buying a car with a personal loan or a specific “car loan”.

Car Loan

Car loan interest rates can be lower than personal loans, especially if the car is new – or relatively new – and can secure the loan. (See more on this below).

However, car loans are specifically for the car purchase and may not account for any modifications you may make to it, like new seat covers, a custom paint job, upgraded rims or the sports or safety pack.

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, etc. If you want to buy a second-hand car and make modifications to it, then you can. 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?

In the same way as when someone buys a home, the car is an asset that provides the lender with some security for the loan. If you are unfortunate enough to ultimately be unable to pay your loan, then the lender has the option to sell your car to recoup 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 2 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 generally higher to offset the risk.

An IMB unsecured personal loan is an option when buying a car that is over 6 years old.

Used Car vs New Car Loans

The major difference between the types of loans available for a new car and a used car is the value of the asset (car) that can potentially secure the loan. Usually that means the more valuable the asset, the better rate of interest available.

New Car Loan

Unless it’s a collectible classic, a car is almost never 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 2 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 be secured by their value (usually because of how ‘young’ they are) and those that are not assessed to be a security (older cars).

Secured Used Car Loan

At IMB, cars that are between 2 and 6 years old may qualify for a Secured Personal Loan. This 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 offers 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. Speak with one of our team about the options on 133 462.

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 do 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, which can affect your repayments.

At IMB, our car loans are fixed rate car loans. These provide certainty for repayments over the loan term; you know what you are getting and what you will have to pay over the life of the loan, no matter the market fluctuations. IMB car loans also 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 figure that runs alongside the advertised rate in all financial products, the Comparison Rate 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:

Product

Interest rate

Fees & Charges

Comparison Rate

Repayments/
Month

Total Repayments

Car Loan A

7%

0.6% 

7.6%

$603

$36,154

Car Loan B

7.25%

0.1%

7.35%

$599

$35,940

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 is actually cheaper 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 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 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. If you would like to find out more about IMB’s insurance options, or call our team.)

Used Car (including cars less than 2 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 approve car loans for students, provided you can meet the above criteria and are a permanent resident. You can Messenger our Team through Facebook or simply give us a call for more details.
 

 

How much will my car loan repayments be?

IMB’s car loan calculators make understanding your repayments and the total amount payable over the life of the loan easy. They even show you how much money and time you can save if you increase your repayments beyond the minimum. IMB Bank car loan repayment calculators are 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 more 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 state to state.

Stamp duties: State governments in Australia have the right to levy taxes on the purchase price of any vehicle you purchase. You may find that costs associated with stamp duty will depend on the purchase value of your car and what state you buy it from. For vehicle stamp duty in NSW go here; for a list of stamp duties in other states, 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 strongly 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. Depending on the manufacturer, a new car may require servicing every three months in its first year on the road. After that it could be every 6 months or 10,000km, whichever comes first. Depending on the model, a service could cost several hundreds of dollars, even thousands if it is something at the very high-end, like a Ferrari.

When shopping for a new car, look 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 for months or even years. It is always worth asking a dealer for every consideration when negotiating on the conditions of sale.

How should you adjust?

It's possible that, after you've added up the whole cost of obtaining and keeping various vehicles, you may find it necessary to change your buying strategy. 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 rather than the manufacturer's list price, which 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. Consider 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.

 

Important Information:
This article has been prepared by IMB Bank for general information and reference and it is not intended to be advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice when appropriate, and consider the relevant Terms and Conditions or Product Disclosure Statement before deciding whether to acquire any products or services offered by IMB Bank. Lending criteria, terms and conditions, fees and charges apply to IMB loan products. We do not recommend any third party products or services referred to in this article and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. IMB Bank acts on behalf of a range of insurer for a range of insurance products. In relation to Motor Vehicle Insurance, all insurance is subject to acceptance by, and is issued by AAI Limited ABN 48 005 297 807 trading as Vero Insurance (Vero). Please refer to the relevant Product Disclosure Statement (PDS), Supplementary Product Disclosure Statement and policy wording for the full terms of the insurance including exclusions and limitations. A PDS is available from IMB. You should consider the PDS before making a decision about this product. IMB will receive a commission for insurance arranged. Neither IMB Ltd nor any of its related companies guarantee the benefits payable under the insurance. All benefits are payable solely by Vero. You may take out the Insurance with any insurer of your choice. All cover is subject to acceptance by Vero.