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Want the lowest interest rates

Shopping around for the lowest car loan interest rates? Get some tips on what to look for.

Factors that influence your interest rates

If you're looking for the lowest car loan interest rates, there are some factors that could influence the car finance rates you end up paying.

Secured Loan

Getting a secured car loan means the car (or sometimes other collateral) is security for the amount you're borrowing. This means the car can be seized by the lender if you default on your loan commitments. As a result you will typically pay a lower interest rate for a secured loan than for an unsecured loan.

If you're buying a used car make sure you check the rules on secured loans with your lender up front - if you're tossing up between two cars that are slightly different ages one might not be eligible to be security for a loan and you'll pay a higher interest rate.

Loan term

Some lenders offer lower annual interest rates for longer loan repayment terms.

If you're chasing cheap car loans and were planning to pay your loan off over four or five years, compare lenders based on the rates they charge for these specific terms so you're comparing apples with apples.

However, don't extend your loan term just to get a lower annual interest rate. A lower interest rate means you're paying a lower percentage each year, but by unnecessarily adding years to the repayment period the total amount of interest you pay over the life of the loan increases.

Tip: If you're considering opting for a longer loan term to reduce your repayments, but intend pay the loan out early, check to make sure you won't be charged a penalty fee to recover the interest the lender has missed out on.

Credit quality

While not standard practice for all lenders, your credit risk profile can influence your interest rate. This is a similar concept to insurance - if you have the profile of a low risk driver you pay a lower insurance premium, and vice versa, rather than everyone paying the same amount.

For car finance rather than your driving profile it is your likelihood for the loan to 'go bad' that is assessed, and if you are low risk some lenders could quote you a lower interest rate.

This 'risk rating' concept can also extend to niche lenders - if all their borrowers have very good credit quality (similar to only insuring Rate One drivers), the lender then has lower costs and so can afford to offer a lower interest rate to everyone on their books.

Other features to consider

The interest rate you pay has a direct impact on the cost of borrowing, however it is just one feature and there may be other things to consider in securing the best car loan rates.

The table below shows the same loan with three different interest rates. The difference in interest between a 10% and 10.5% interest rate is $173 over the 4 year loan term. This could be less than the difference in application fees, which can be over $300.

  Loan A Loan B Loan C
Amount borrowed $15,000 $15,000 $15,000
Loan term 4 years 4 years 4 years
Annual interest rate 10.0%p.a 10.5%p.a 11.0%p.a
Monthly loan repayments $380.44 $384.05 $387.68
Total interest over the life of the loan $3,261 $3,434 $3,609
Additonal monthly loan repayments   $3.61 $7.24
Additional interest over the life of the loan   $173 $348

As well as application fees some lenders charge monthly service fees or discharge fees for paying off the loan early. For example, a $3 monthly fee would add $144 in costs over 4 years.

Low rate alternatives

Mortgage Redraw

If you have made extra payments on your home loan, you may have funds you could redraw from your mortgage to finance a car purchase.

Generally speaking, home loan interest rates are lower than car finance and you may be tossing up which option makes better financial sense. But there are other things to take into account than interest rate alone. Read Using your mortgage to finance a car: what to consider for more information.

Low Interest Credit Cards

Credit card companies can come up with deals from time to time that sound almost too good to be true - some with interest rates as 0%! So, could you use these deals to finance a car purchase and pay less interest?

We've looked at situations when buying a car on a credit card can make sense, and things you should be aware of. Read Buying a car with a credit card to see how credit cards and car loans compare.