Understanding Car Loan Rates In Australia

Borrowing money to buy a car is a useful option if you need to get a good quality vehicle

, but you haven't the cash saved to readily purchase the vehicle of your choice. Understanding car loan rates in Australia will help you during the borrowing process. There are two key types of loans, variable and fixed interest rate, each of which provides you with different advantages and disadvantages when buying your own vehicle.

Car loans in Australia

When buying a car and seeking finance for the vehicle, the two main types of car loan are secured car loans and unsecured car loans. This is a simple difference, which reflects whether the loan is offered against the value of the car, or if the loan is provided in the form of a personal loan. This works quite simply. If you wish to buy a car worth $7,000, then the bank will generally lend you that money with the details of the car that the loan has been made against. A personal loan considers your individual circumstances and ability to repay the loan, without notating the details of the vehicle purchased using the money lent.

Car loan rates in Australia

There are two types of loan rates that are used when calculating interest on a loan for a vehicle in Australia. The two rates are as follows:

Fixed interest rates - As the name suggest, this type of loan is for an amount that is fixed. This means that however much you borrow and whatever the rate of interest being offered when you fix the rate for the loan is the amount you will always pay on the loan. If you borrow at 7.5% on a fixed interest rate, then the interest must remain 'fixed' at that point for the life of the loan.

Variable interest rates - A variable interest rate is more complicated, but essentially it is an interest rate that varies with fluctuations in the economy and subsequent fluctuations in interest rates. In a scenario where you choose a variable rate, you may choose not to lock yourself into the fixed rate of 7.5%, opting for a lower rate of interest of say 6.25% instead. If interest rates were to drop to 5%, you would benefit from that drop; equally, you would be impacted if the interest rate you started with increased to say 9.75%. The advantage of the variable interest rate is that it is likely to be less at the time the loan is take out, but over the life of the loan, that lower rate could rise significantly against the rate you could have locked in with a fixed rate.

Choosing a loan is about personal choice, the financial outlook and your individual tolerance to risk. You may be happy to take a variable rate and run the risk of rates increasing during the life of the loan, this is your personal acceptance of risk. On the other hand, you may feel that it is more prudent to lock your loan in place at a slightly higher rate, but with the confidence that the loan will not alter during the loan period.

by: Mary B Molski

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