Paul Clitheroe
Paul Clitheroe

Shop around for Car Loans

MANY sectors of our economy are feeling the pinch at present, so it's surprising to learn that sales of new cars have climbed over the last year.

Buying a new car is always exciting, but along with choosing the right make and model, it's important to think about how you'll fund the purchase.

Many people still use a personal loan or car loan to buy a vehicle. This sort of loan is what I call 'sadly necessary' debt because while many of us need a car in our everyday lives, it's an asset that rapidly falls in value. Along with depreciation, you also face loan interest charges, so it's worth shopping around for a loan offering the best deal.

The big banks are currently charging anywhere between 11% and 14% on car loans and personal loans. For a vehicle costing $30,000 that could mean paying from $9,000 to $14,000 in interest over a 5-year term.

Credit unions and building societies are very strong in the car loan market, and presently you may be able to secure a loan costing less than 9% with the likes of CUA, IMB and Companion Credit Union.  On the same $30,000 loan this could cut the interest cost to just over $7,000.

Along with a low rate, look for a loan that allows extra repayments. Car loans are becoming more flexible, and even small extra payments can mean big savings in interest.

Also consider the type of vehicle you buy. An eco-friendly car may cost more upfront but you could save money on finance charges. Bankmecu for example offers a 'goGreen' car loan with a comparison rate of 8.45% for new and used car less than 7 years old cars with the highest ANCAP safety rating of 5 stars or a greenhouse rating of 7+.

Using your home loan to fund a car will let you take advantage of even lower mortgage interest rates. The trouble is, the overall interest charge can really blow out unless you make extra payments to pay off the vehicle within a few years.

As a guide, extending a $300,000 mortgage by $30,000 to pay for a new car could mean paying an extra $29,000 in interest even if the mortgage rate is just 6.25%. It works this way because you're swapping a short term debt like a car loan for a long term mortgage, and that means you're paying interest over a far greater period.

Having finance pre-approved from a bank or building society before you hit the car yards is a sensible way to avoid what can be costly dealer finance. That said, some car groups and dealerships offer very competitive financing rates at various times of the year. But many don't, and opting for dealer finance could mean paying more than you need to for your car.

Websites like and offer an easy way to compare car loans, and many have online calculators that show the likely monthly repayments. Make sure you shop around - rates vary significantly.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit for more information.

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