Understanding car financing and interest rates

Are you ready for some new wheels but not sure how you’ll pay for it? Trying to get your head around finances, car loans, credit rating and more can be daunting. Well fear not. Here is a guide to help you through financing your new car.

What does my credit history say about me?

Before you can be approved for any loan, the lender will conduct a credit history check. Institutions need to be satisfied that you're able to pay them back. If you have ever defaulted on a payment, or not paid a bill on time, this can negatively affect your credit rating. You could pay higher interest rates, or even have your loan application rejected, so always try to keep on top of your personal finances.

Each time you apply for a loan or any kind of finance, this information is recorded. If a financial institution sees you have made multiple applications in a short period of time, they may assume you are a default risk. Even if you've never had a loan or even a credit card before, your employment history and financial records are strong evidence of credit.

What is the difference between a fixed and variable loan?

A fixed interest rate is the rate you pay throughout your repayment period. It won’t change which makes it easy to budget. NRMA offers fixed-rate loans. A variable rate is riskier. Instead of the rate being fixed, the interest rate can go up or down at any time.

How is that different from a secured or unsecured loan?

A secured loan is when your purchase acts as security against the loan. This means if you default on your payments, the lender has a right to seize your car. 
Unsecured loans will often only be issued under certain circumstances. Even then, they can come with a higher interest rate and uncompromising repayment period.

Always check the comparison rate

The comparison rate is the total rate of interest you'll end up paying. This includes the basic interest rate as well as any additional upfront or ongoing fees and charges. Comparison rates include the amount and term of the loan, the repayment frequency, the basic fee and the additional fees and finance charges associated with borrowing the loan.

The comparison rate doesn't include fees such as stamp duty, or fees that may be charged such as an early repayment fee. When considering comparison rates, keep in mind that certain costs are excluded from the figure.

Do your research

There are plenty of institutions offering loans, and it can be difficult to work out where to go. Banks, car retailers and other financial institutions all have pros and cons. Check if your loan has redraw facilities, loan portability or additional fees - such as early repayment.

Many institutions have a car loans calculator to determine what your repayments will be, and for how long.

NRMA offers some fantastic features in our car loan options.