How Are Car Finance Rates Calculated in Australia?Published Tuesday, March 15, 2022
If you are planning to buy a car, you may not have the lump sum to make a single payment. In that case, you will probably need a loan. And if you plan to take out a loan, you may wonder what car finance rates you can expect.
Purchasing a vehicle is a big step, and a car loan is a major financial commitment. So how do interest rates work, and how can you make sure you get a loan on favourable terms?
How Do Car Loans Work?
Car loans are a type of personal loan targeted specifically at purchasing a new or used car. People who take out car loans need to repay both the lump sum (the principal) and any interest they accrue over the repayment term.
Car loans come in several types, including:
- 1. Unsecured loans, in which the borrower does not need to provide collateral
- 2. Secured loans, in which the borrower provides the car as collateral and the lender may repossess the vehicle if the borrower fails to make payments on time
- 3. Fixed interest rate loans, with an interest rate that remains constant throughout the loan term
- 4. Variable-rate loans, with repayments that may change depending on the shifting interest rates
The average car loan amount in Australia hovers around $30,000, but loan amounts may be as low as $5,000 or as high as $100,000, depending on the buyer’s needs and ability to pay. Loan terms typically range between 1 and 10 years.
Depending on various factors, interest rates on car loans may fall anywhere from 2.99% to 10% for secured loans. Unsecured loans, which involve a higher risk on the lender’s part, may have interest rates as high as 15%.
Who Qualifies for a Car Loan in Australia?
Although eligibility criteria may vary depending on the lender, loan type, and interest rate, a person who applies for a car loan in Australia will typically need to provide:
- Proof of age and ID. Car loans in Australia are available to citizens or permanent residents aged 18 and older.
- Proof of income. The applicant should be able to present bank statements, payslips, or other documentation that shows they can afford to repay the loan, plus their record of monthly expenses.
- Information on assets and liabilities. Loan applicants will usually need to disclose what they own, such as a home and other vehicles, and what they owe, such as a mortgage, personal loans, or credit card debt.
Some types of car loans require the borrower to have a good or excellent credit score. Other loan packages are available to borrowers with lower credit scores, but these types of loans typically won’t offer the best car finance rates.
Factors That Influence Car Finance Rates
When you take out a loan, you will need to repay the principal plus interest. Interest is the fee borrowers pay for using the lender’s money. The interest rate typically reflects the lender’s level of risk in loaning money to a borrower—that is, borrowers that count as low-risk may usually expect better loan terms and lower interest rates.
So what will determine the interest rate on your car finance offer? Let’s break this down.
The length of the repayment period will influence interest rates. Shorter loan terms with higher monthly repayments typically offer the advantage of lower interest. Longer terms have lower monthly deposits but also higher interest rates.
At the end of a loan term, two borrowers who took out the same amount of principal might end up paying vastly different amounts due to interest.
Loan applicants who can provide a larger down payment count as lower-risk borrowers and may qualify for lower interest rates and better loan terms. In contrast, borrowers who make little or no down payment should expect higher interest rates.
Choice of Vehicle
In secured loans, the vehicle you purchase serves as collateral. A new car is more reliable and less likely to need repair. Although this isn’t a hard and fast rule, a loan for a new car may have a lower interest rate compared to a used car.
Credit Score and History
Before a lender approves you for a loan, they will look at your credit score and history. People with a good credit score and a history of responsible financial behaviour will find it easier to qualify for good car finance rates.
Factors that can influence your credit score include:
- The length of your credit history
- The type and number of your credit applications
- Any existing loans or mortgages
- A history of past debts and repayments
- High-risk financial behaviour like bankruptcies, defaults, or credit infringements
In general, people with a track record of timely payments and low-to-no debt will have higher credit scores.
Australia’s three CRBs (credit reporting bodies) include Experian, Equifax Australia, and Illion. Each CRB has a slightly different method for calculating credit scores. You can check your score and view your credit report through any of the three agencies.
Credit scores in Australia range between 0 to 1000 (Illion and Experian) and 0 to 1200 (Equifax). Here is what constitutes an average score with the three agencies:
- Illion: 500 to 699
- Equifax: 622 to 725
- Experian: 625 to 699
Anything above these ranges will count as very good to excellent and will usually qualify you for convenient car finance rates. A credit score below average may make car financing tricky.
Knowing your credit score can help you foresee what terms you may expect on your car loan. Additionally, you can use your credit report to identify problematic financial patterns that bring down your credit score.
What If Your Credit Score Prevents You From Qualifying for a Car Loan?
If you have a low credit score, getting a car loan may be more difficult, but not impossible. It depends on your individual circumstances.
For example, if you have been bankrupt for a year but now have a stable job and can provide a sizeable deposit on a car, you may be able to qualify for a loan. Making payments regularly throughout your loan term will not only secure your vehicle but also help you rebuild your credit.
Make sure you review your potential car finance rates and understand all the terms. Look at the comparison rate, which is the interest rate together with all charges and fees. You may notice that because you have low credit, you have received a loan offer with unfavourable terms or high repayments.
A credit score is not set in stone. It won’t happen overnight, but you can improve your credit score by consistently paying off your debts and utility bills on time. Also, consider refraining from too many new credit applications, as those can have a negative impact on your credit score.
Calculating Car Loan Interest
The basic annual interest formula equals the interest rate divided by the number of payments, multiplied by the amount of loan principal. Here is how this works.
1. Divide your annual interest rate by the annual number of payments. If you make repayments once a month, divide the interest rate by 12.
2. Multiply the result by your loan balance. When you make your first payment, the balance equals the whole principal.
Let’s say you have taken a car loan of $20,000, at an interest rate of 5% per annum. You make repayments once a month. In this case, your interest formula for the first repayment will be:
(0.05÷12) X 20,000 = 83
As you proceed with your loan payments, the amount of interest you pay every month will differ depending on your updated loan balance. To calculate your new balance, subtract the interest amount above from your repayment, and then subtract the result from the principal.
For example, if your monthly repayment equals $500, the new balance for your second repayment would be:
20,000 (500 – 83) = 19,583
Then, to calculate the amount of interest for the next month, you would use the following formula:
(0.05÷12) X 19,583 = 81
You can see that the interest amount for the second repayment is slightly lower. As your loan balance shrinks from month to month, the amount of interest you pay will diminish as well. Therefore, repaying your loan in larger instalments means you pay less interest overall, even though the interest rate per annum doesn’t change.
Is There Such a Thing as a 0% Interest Car Loan?
Some lenders claim to offer 0% interest car finance rates. While it sounds highly attractive, remember that lenders have to make money. “0% interest” is usually a marketing strategy that comes with a catch, like an inflated vehicle price, a rigid loan structure, large deposits, balloon repayments, or inconveniently short loan terms.
How Much Should You Borrow?
Not all applicants can get car loan approval for any amount. Your maximum car loan amount will depend on your income vs expenses, credit score, a history of past debts and repayments, and other factors.
However, just because you qualify for a car loan doesn’t mean you should borrow the highest possible amount. We recommend studying your income and expenses to calculate how much you can realistically afford to pay. Consider any drains on your income that you expect to occur during the loan term, such as moving house or sending a child to university.
A good rule of thumb is to ensure that the cost of the loan plus interest, divided into monthly payments, does not exceed 10% of your take-home income.
If you can’t afford the car of your dreams right now, it’s better to settle down for a less expensive model and save up to purchase a newer and pricier vehicle down the road. Driving a new car is far more enjoyable when you avoid financial strain and preserve your peace of mind.
The Benefits of Car Financing Through an Auto Dealership
When you compare car loans, you may consider applying for car financing at your local bank or contacting a loan broker. However, in many cases, getting a loan directly through an auto dealership is a more convenient choice that provides better car finance rates.
Here are just a few benefits you enjoy when you work with a large, trustworthy dealership for car financing:
- Convenience. Car dealerships usually have established relationships with reputable lenders. The dealership can arrange the loan on your behalf, which means less hassle for you.
- Speed. When you arrange car financing through a dealership, you will often be able to select the perfect car, settle on loan terms, and drive off—all in one day.
- Flexibility. Many potential car buyers struggle to qualify for traditional financing through a bank. Thanks to their connections and experience, a car dealership may find a suitable loan option even for clients with lower credit scores.
- Deals and promotions. Often, auto dealerships propose attractive loan promos with ultra-low car finance rates or cashback offers, especially on new cars.
How Car Finance Works at Westside Auto Wholesale in Perth
At Westside Auto Wholesale, we commit to providing the best possible car finance rates. We have one goal: to help our clients drive away happy, knowing they have purchased the right vehicle on the right terms.
Here is what our team at Westside Auto Wholesale offers to clients who need a car loan:
- Same-day approvals. Approved customers enjoy easy same-day car finance options, so getting behind the wheel is quick at Westside Auto Wholesale.
- Custom finance packages. We offer competitive rates on individually tailored car finance programs to suit your needs and budget.
- Seamless car finance service. Our finance managers are here to talk about your finance choices and offer a fast, no-obligation quote.
At Westside Auto Wholesale, we believe in simple car financing. We aim to help every customer purchase a vehicle with no hassle, complications, or pressure.
Westside Auto Wholesale: Best Car Finance Options in Western Australia
Do you need a car loan? At Westside Auto Wholesale, the largest one-spot used car dealership in Australia, we offer convenient finance options. Our same-day car loan options come in custom-tailored finance packages to accommodate every customer’s needs.
Get behind the wheel fast with car finance from Westside Auto Wholesale in Perth. Are you ready to learn about our car finance rates? Call us on (08) 6145 0099 today.