Car loans

Getting a car loan

Whether you're a first time car buyer who just got your P-plates or a motoring enthusiast after a sleek new ride, a car loan could be just the answer to your car dreams.

But before you sign up with the first loan you find, read our tell all guide that will show the different car loan types available and the five essential steps to take to ensure you grab a knockout deal as well.

Car loan types

The saying “one size fits all� does not apply in the car loan world, as there are a range of car loan types available to suit everyone from the classic car lover to the latest sports edition cruiser. So let's start from the top:

New car loan: Did you know you'll get a better loan deal with a new vehicle? This is because new car loans are usually secured which means you use your new car as security for the loan. The reason providers offer lower rates and fees for new cars is because they are considered a lower risk, as you are the first owner and the car is unlikely to have the underlying problems of a used car with multiple owners. This makes it easier for the provider to get their money back if you default on the loan and they have to sell your car to recover their loss.

Used car loan: The great thing about purchasing a pre-loved vehicle is that you'll get a much better deal at the car yard or with a private seller because cars depreciate so quickly in value over the first few years. While you'll save on the total cost of the car, you'll generally have to pay a higher interest rate and fees when it comes to taking out a car loan because lenders consider used cars a higher risk. And while you may be able to secure your car loan with a used car, usually providers have a cap on the age of the car of up to 5 years. So if you love that 1990s Jaguar, you'll have to go for an unsecured loan that requires no security but will have a higher rate and fees.

Once you've decided whether you will be taking out a car loan designed for a used or new car, you could also consider the below specialist car loan types:

Green car loan: Love the environment? Then a green car loan, which is usually available for both new and used cars from providers like bankmecu, Bendigo Bank or Community First Credit Union could be just for you that works by rewarding you with a more competitive interest rate and lower fees if you purchase a car with low carbon emissions or a high ANCAP star rating (check with the provider for their specific requirements). Plus, some providers like bankmecu will even plant trees to offset your car's carbon emissions.

Special offers car loan: Did you know you can rack up juicy rewards points while paying off your loan or receive member discounts on your interest rate? That's right, at the time of writing there are a range of providers that have special offers on their car loans including, QANTAS Credit Union with a Frequent Flyer offer, NRMA with a member discount and ANZ also offering a discount if you bundle your car loan with its ANZ Loan Protection Insurance.

Salary sacrifice car loan: If you want to bring down your taxable income, you could consider salary sacrificing, which you set up with your employer and means instead of paying your monthly car loan repayments out of your bank account, the money will be deducted from your salary, thus reducing your taxable income.

5 steps to getting a car loan

The car loan type is one thing to consider, but there a few more steps you'll need to take before taking out a car loan:

Step 1: Set a budget

Just because your heart is set on that Audi R8, doesn't mean it's the right vehicle choice for you and your wallet. So take the time to work out how much your ongoing repayments will be, using Mozo's repayments calculator here to get an idea of how much you can realistically afford to borrow.

For example, if you can only afford to repay $760 a month and take out a car loan with a 10% interest rate over a 4 year period, you would only be able to borrow around $30,000.

Step 2: Look for a competitive deal

After you know how much you can afford to borrow, it's time to hunt down a great deal. There are two main ways you can use Mozo to compare car loans; firstly you can scroll to the top of this page to see some of the top car loans on offer today or compare our entire car loan database using our car loan comparison tool.

Are you a refinancer? Punch in your numbers into our Switch & Save Calculator to see how much money you could save by switching to a better car loan deal.

When you begin your car loan comparison you'll be given two interest rate options to choose from - a fixed or variable interest rate.

• Fixed interest rate: With the interest rate locked in for the life of the loan, you’ll never have to worry about a rate rise and your repayments will remain the same. However, you’ll pay slightly higher interest rates and fees than a variable rate loan.

• Variable interest rate: By comparison a variable interest rate changes with the market, so you’ll need to make sure if you choose this option you can afford any rate rises. The major benefits of a variable rate loan are lower rates and fees and more flexibility in the form of fee free extra repayments, a redraw facility and no breakcost fee if you pay out the loan early (see below for a full definition).

Comparison rate: Apart from looking for a competitive interest rate, make sure you take the time to check the comparison rate, a figure that shows you how much the loan will cost once the interest rate is combined with the application and ongoing fees.

And don't forget to check the fees:

• Application fees: Generally speaking, most car loan providers will charge you an upfront fee between $100-$300 to pay for the cost of paperwork and running a credit check to see if you’re a creditworthy borrower.
• Ongoing fees: There are many car loan providers that don’t charge a monthly fee, so when you begin comparing car loans, make sure the car loan you sign up with is free of this pesky fee. Because over 5 years, a small monthly fee of $15 will add up to $900.
• Breakcost fees: As mentioned above, some fixed interest rate loans may charge a breakcost fee if you decide to pay off the car loan before the agreed term has come to an end.
• Termination fees: When your car loan term comes to an end and you pay off the balance, you may be charged a termination fee to cover administration costs and the release of the security they hold over your loan (if you have a secured loan).

Now that we have the interest rate and fees covered, here are some of the features to put on your car loan shopping list:

Fee free extra repayments: When you come into extra cash in the future, don't put it into a savings account with rates less than 4% because you're far better off pumping it straight into your car loan.

Let the below example show you why: Say you can afford to deposit $500 into a high interest savings account each month with a 4% interest rate, over 5 years you would accumulate $3,149 in interest. Whereas if you instead decided to put that $500 into extra repayments on your 10% interest rate car loan, you would pay $3351 less in interest and here's the real winning factor you would cut your 5 year loan down to just 2 years. We know which option we would choose!

Redraw facility: Another flexible option is a redraw facility which gives you the ability to dip into those extra payments you've made, for things like an overseas vacay or a much needed home reno. But this should really be a last resort as redrawing extra repayments you've made will only increase the amount of interest you pay and the life of the loan.

Flexible repayment schedule: Also look out for a loan that allows you to choose between repaying your loan either weekly, fortnightly or monthly to suit your pay cycle. A major benefit of repaying your loan weekly or fortnightly is you'll pay off an extra month by the end of the year. For instance if your fortnightly repayments are $250 (or weekly repayments are $125) at the end of the year you will have paid off $6,500. Whereas, with the $500 monthly option you will have only paid off $6,000 over a year.

Step 3: Check if you're eligible

You might think “yep I've found the perfect loan!� But before you apply it's important to check your credit rating to ensure there aren't any mistakes on it that could lead the provider to reject you for the car loan. You can find out how to get a free copy of your credit report here.

And the worst part of being rejected for a loan (apart from the wasted effort of applying) is every time you are rejected it will show on your credit report, which will make it harder for you to get approved for larger ticket items like when you want to take out a home loan.

Step 4: Organise your paperwork

You're almost ready to apply for your car loan, all you need to do now is organise your documents. Here are some the provider is likely to ask for:

Proof of income: The provider will want to see that you are in the financial situation to service the car loan and will ask for at least 3 months' worth of payslips or if you're self employed your last 2 tax returns.

Utility and debt statements: You'll also probably be asked to provide statements of your latest credit card/personal loan bills and utility statements, so the provider can see that you have been meeting your current obligations.

Savings: Another way they will assess how risky you are to lend to, is by looking at your bank account and savings account statements, to see how much is coming in and out of your accounts.

Identification: Last but not least if you don't already bank with the provider, they'll need to know who you are and may ask for identification like your driver's licence, passport or birth certificate.

Keep in mind, all lenders have different documentation requirements, so check with the lender for specific details.

Step 5: Apply!

Almost there...if you find a car loan that takes your fancy in the tables above all you need to do is click on the blue 'go to site' button and you will be taken to the provider's application page and there you can kick off your application.