New research in Europe has revealed that over 25% of motorists have no idea what type of interest they’re paying on car loans. If you already have car finance, or are thinking of taking some out, then it’s important that you understand what you’re paying, and why.
As you’ll have noticed, credit finance – whether it’s car, boat or caravan loans – comes with a whole range of interest rates attached. Rates on borrowing currently to be found in Australia range from 5% to upwards of 15%, and everything in between.
The reason they’re so different comes down to risk. In short, the lower the interest rate, the lower the risk you represent to the credit provider. So, if you’re able to provide security, usually in the form of property or another asset, then it’s more likely that you’ll benefit from the lowest rates. This is because a secured loan means the lender can sell the asset to recover their loss if you default on your repayments for some reason.
It’s important to understand that the finance provider will hold the title to your property until you have fully repaid the loan. If you have an accident or fall ill, and are unable to earn an income to repay your loan, the lender can force the sale of your home or property. For this reason, it’s worth taking out an income protection policy that keep you secure if you’re unable to work.
If you’re looking for a loan to buy a home or commercial property, and you’re able to pay at least 20% of the purchase price as a deposit, the loan will be viewed as lower risk. This is because property prices usually increase, meaning that the lender’s money will be a lot easier to recover if they’re forced to sell it due to a buyer default on repayments.
The lower the deposit you can pay, the higher the interest rate is likely to be. If you’re self-employed, or don’t have a positive credit history, then you may also be viewed as higher risk for any form of loan, unless you can provide either a large deposit or strong security.
If you’re unable to provide security for a loan, then the interest rate is likely to be a bit higher, as the risk to the lender is higher. If you have a short positive credit history, there are lenders who can assist you, but the interest rates will reflect the level of risk they’re taking.
With risk level established, the lender can also decide whether to offer you a fixed or variable interest rate. With a fixed interest rate, your repayments will stay the same from beginning to end of the loan’s term period. This will help you to budget, but you may have to pay penalties if you pay it off early.
A variable rate is usually lower to start with, but the interest on repayments will vary throughout the loan’s term. The early payout penalties are usually lighter, but this type of loan offers you less financial stability overall. There’s always the chance that lenders will change the rate to suit their own purposes, regardless of what rates the Reserve Bank of Australia is setting.
Our recommendation is to talk to your finance provider to find out the best deal for your situation. With relationships with over 30 different lenders, 1800Approved can find you the best deals and lowest interest rates, as well as a greater chance of being approved.
Topics: Car loan