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What is the average interest rate on car loans?
An interest rate is essentially the cost you pay to borrow money. When you take out a car loan, this is the percentage of the loan amount you'll pay back on top of the amount borrowed.
In Australia, the average interest rate on car loans typically ranges from around 5% to 12% per annum (p.a.), though may be higher. Rates can vary depending on factors such as:
- Credit score: perhaps one of the most significant factors affecting interest rates is your credit score. Lenders use credit scores to assess your creditworthiness, with higher scores typically resulting in lower interest rates and vice versa.
- Lender: different lenders have varying risk appetites and operating costs, leading to a range of interest rates. Banks typically offer competitive rates, but online lenders might have even lower rates. On the flip side, dealership financing often comes with higher interest rates.
- Loan term: shorter loan terms (e.g. three years) generally have lower interest rates than longer terms (e.g. seven years) – but also have higher monthly repayments.
- Loan amount: larger loan amounts can sometimes qualify for slightly lower interest rates from some lenders. However, high-risk borrowers may face increased interest rates on larger loan amounts.
- Type of vehicle: new car loans often have lower interest rates than used car loans because they have a lower depreciation risk. Lenders might also offer lower rates for environmentally friendly vehicles like hybrids or electric cars.
- Fixed vs variable interest rates: fixed rates remain constant throughout the loan term while variable rates may fluctuate based on market conditions.
- Personal circumstances: your individual financial situation, employment status and income level can also influence the interest rate offered by lenders.
What is a car loan comparison rate?
When comparing car loans, it's crucial to look beyond just the advertised interest rate and consider the comparison rate as well. You can find the comparison rate listed alongside the advertised interest rate on any car loan offer. The comparison rate takes into account both the interest rate and any applicable fees and charges associated with the loan, providing a more accurate representation of the total cost of borrowing. As the table below shows, you can end up paying more overall even if you have a lower interest rate:
| Car loan | Interest rate | Fees | Comparison rate | Monthly repayment |
|---|---|---|---|---|
|
Package A |
7.45% p.a. |
0.5% p.a. |
7.95% p.a. |
$405.05 |
|
Package B |
6.95% p.a. |
1.75% p.a. |
8.7% p.a. |
$412.26 |
How can my credit score affect car loan interest rates?
Your credit score is a numerical representation that reflects your creditworthiness. It is used by lenders to assess the risk of lending you money and plays a vital role in determining the interest rate you'll receive, impacting your monthly payments and the overall cost of the loan.
There are three main credit reporting agencies in Australia: Equifax, Experian and illion. Each agency maintains a credit report on you, containing details about your credit history, including loans, credit cards and repayment behaviour. From this, it formulates your credit score. Credit score ranges for each of the agencies are as follows:
| Equifax | |
|---|---|
|
Below average |
0 – 459 |
|
Average |
460 – 660 |
|
Good |
661 – 734 |
|
Very good |
735 – 852 |
|
Excellent |
853 – 1,200 |
| Experian | |
|---|---|
|
Below average |
0 – 549 |
|
Fair |
550 – 624 |
|
Good |
625 – 699 |
|
Very good |
700 – 799 |
|
Excellent |
800 – 1,000 |
| illion | |
|---|---|
|
Zero |
0 |
|
Low |
1 – 299 |
|
Room for improvement |
300 – 499 |
|
Good |
500 – 699 |
|
Great |
700 – 799 |
|
Excellent |
800 – 1,000 |
Sources: Equifax – Experian – illion
Information correct as of April 2024.
While the scoring models differ slightly between agencies, a higher score signifies a lower risk of default for the lender, translating into a lower interest rate for you. Lower credit scores, meanwhile, may result in higher rates or difficulty securing a loan.
How much interest will I pay on my car loan?
The interest you pay can have a significant impact on your overall loan payments, so it’s useful to understand how it works. Even a slight change in the interest rate can make a big difference in how much you end up paying in interest over the life of your loan. The following table shows the impact of different interest rates, based on a loan repaid monthly over five years:
| Loan size | 7.00% p.a. | 8.00% p.a. | 9.00% p.a. | 10.00% p.a. |
|---|---|---|---|---|
|
$30,000 |
$5,643 |
$6,498 |
$7,366 |
$8,245 |
|
$40,000 |
$7,523 |
$8,664 |
$9,821 |
$10,993 |
|
$50,000 |
$9,404 |
$10,830 |
$12,276 |
$13,742 |
|
$60,000 |
$11,285 |
$12,996 |
$14,731 |
$16,490 |
|
$70,000 |
$13,166 |
$15,161 |
$17,186 |
$19,238 |
To calculate car loan interest over the course of the loan, you need to know the loan amount, the interest rate and the loan term. Here is a simplified formula to use to get an idea of how much interest you will pay:
Interest = loan amount × interest rate × loan term
Example: You borrow $20,000 for a car loan with an interest rate of 5% (expressed as 0.05 for calculation) and a loan term of 4 years.
Total interest = $20,000 x 0.05 x 4 years = $4,000
Keep in mind that this formula only calculates the total interest paid over the loan term. It doesn't include your monthly payments or the total loan cost, which would be the loan amount plus the total interest.
For a more precise calculation, you can use a car loan calculator to understand what your overall monthly repayments could be.
How can I get a better interest rate on my car loan?
Here are some tips for getting a good interest rate for a car loan in Australia:
Improve your credit score
Make timely payments on your existing debts, reduce outstanding balances and avoid opening new credit accounts to boost your creditworthiness. By monitoring and improving your credit score, you can increase your chances of qualifying for lower interest rates.
Shop around
Compare interest rates and loan terms from various lenders. Don't settle for the first offer you receive; instead, explore multiple options to find the most competitive rate.
Put down a deposit
Putting down a down payment reduces the amount you need to borrow, which can result in a lower interest rate.
Buy a new or near new car
Newer cars might qualify for slightly lower interest rates due to slower depreciation and warranty coverage, reducing lender risk.
Choose a shorter loan term
While longer loan terms may offer lower monthly payments, they often result in higher overall interest costs. Shorter loan terms typically come with lower interest rates.
Is the lowest interest rate always the best?
While a lower interest rate is generally beneficial, it's not the only factor to consider when choosing a car loan. Here’s why:
- Fees: some lenders might offer a slightly lower interest rate but compensate for it by charging higher upfront fees or ongoing account maintenance fees. Make sure to compare the total cost of the loan, including both interest and fees, before making a decision.
- Loan features: some lenders might offer features that can be valuable depending on your needs. This could include the ability to make extra repayments without penalty or flexible repayment schedules. A slightly higher interest rate might be worthwhile if the loan offers valuable features that align with your priorities.
- Your financial situation: consider your overall financial situation. If you can afford a higher monthly payment to secure a significantly lower interest rate, it might be a good choice. However, if a lower monthly payment (potentially with a slightly higher interest rate) fits your budget better, it might be the more practical option.
What is a 0% interest car loan?
A 0% interest car loan, also known as a zero percent, interest-free or no-interest car loan, is a financing option offered by some car manufacturers or lenders where borrowers pay no interest on the loan amount. Essentially, you're borrowing money to purchase a car without any additional interest charges added to the loan. This can result in significant savings over the life of the loan compared to traditional loans with interest.
However, it's important to note that 0% interest car loans are typically offered for a limited time, often as promotional offers, and may require excellent credit to qualify. Additionally, in some cases, choosing a 0% interest loan might mean forgoing other incentives or discounts that could potentially save you more money on your car overall. It's essential to carefully consider all aspects of the loan offer and compare it with other financing options before making a decision.
What other costs do I need to consider when taking out a car loan?
Interest isn't the only cost to consider when taking out a car loan. Here are some additional expenses to factor in:
- Fees: There can be various fees associated with car loans, including origination fees, processing fees and administrative fees.
- Stamp duty and registration: you'll need to factor in stamp duty on the purchase price of the car, as well as registration fees to legally operate the vehicle.
- Insurance: most lenders require borrowers to have comprehensive insurance coverage on the vehicle. The cost of insurance can vary based on factors like your driving record, the type of car you're buying and your location.
- Maintenance and repairs: budget for routine maintenance like oil changes and tyre rotations. Unexpected repairs can also pop up, so having some savings set aside for car maintenance is a good idea.
- Depreciation: cars typically lose value over time due to depreciation. Consider how the car's value will decrease over the life of the loan and factor this into your overall cost of ownership.
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