No matter your reason, it’s crucial to research the best loan options for your circumstances and compare deals. To make it easier, we’ve compiled everything you need to know about car loans in one place—so let’s dive in!
New vs Used Car Financing
Your car’s age plays a big role in your loan terms:
- New cars typically attract lower interest rates and better loan conditions.
- Used cars, especially older models (15–25+ years), may not be eligible for secured loans, which could mean higher interest rates.
Secured vs Unsecured Loans
Car loans fall into two main types:
- Unsecured Loans: No collateral is required, making them riskier for lenders and often leading to higher interest rates. These may be an option if the car is too old for secured finance or if you need to borrow more than the purchase price.
- Secured Loans: The vehicle serves as collateral, meaning the lender can repossess it if repayments aren’t met. These loans generally offer lower, fixed interest rates.
Interest Rates
Your interest rate is influenced by several factors, including:
- Your credit score
- Loan type (secured vs unsecured)
- Loan term length
- The lender’s policies
To get the best rate, compare multiple lenders and tailor the loan to your financial situation.
Loan Term Length
The duration of your car loan affects repayments and total interest paid:
- Longer loan terms = lower monthly repayments but more interest paid overall.
- Shorter loan terms = higher repayments but lower total interest.
Check for early repayment fees, as paying off your loan early could incur additional costs.
Down Payments
Making a larger upfront payment can be beneficial:
- Reduces monthly repayments
- Lowers total interest paid
- May help you secure a better interest rate
While not always required, putting down a deposit can save you money in the long run.
Balloon Payments
Some loans include a balloon (residual) payment, meaning smaller monthly repayments followed by a lump sum at the end. While this can make repayments more manageable, it also increases the total interest paid over time.
Refinancing Your Car Loan
Refinancing allows you to:
- Secure a lower interest rate
- Reduce monthly repayments
- Adjust the loan term or add new features
If you’re not happy with your current loan terms, refinancing could save you money.
Fees to Look Out For
Before committing to a loan, check for hidden fees such as:
- Upfront application fees
- Late payment penalties
- Early loan payout charges
Comparing lenders will help you find the lowest fees and best terms.
Choosing a Lender: Banks, Private Lenders & Dealerships
Car finance options include:
- Banks & major lenders: Typically offer secured loans with competitive rates.
- Non-bank & private lenders: May provide flexible terms but can be more expensive.
- Car dealerships: Offer finance, but the interest rates may not always be the most competitive.
Always compare different options to get the best deal.
Car Insurance – A Must for Secured Loans
If you take out a secured loan, comprehensive car insurance is mandatory. Lenders won’t release funds unless the vehicle is covered.
Opting for agreed value insurance instead of market value can be beneficial, as cars often depreciate faster than the loan balance. This helps prevent financial shortfalls in case of an accident or theft.