Car loans

Looking for a way to finance a car? A car loan is one the best options, especially if you want to own the vehicle instead of leasing it.

By   |   Verified by David Boyd   |   Updated 10th August 2020

Comparing car loans for $30,000.00 over 60 months

Kiwibank Car Loan

Kiwibank Car Loan

Interest rate

From 12.95% (personalised)

Comparison rate

From 0.00% (personalised)

Repayment period

5 years

Application fee

$240.00

Monthly repayment

$687.28

Total repayment

$41,236.80

Highlights

  • Choose a loan period from 6 months to 7 years.
  • The interest rate is fixed, but you can make additional repayments at any time, so you can pay off your loan faster.
  • Interest rates for secured car loans range from 12.99% p.a. to 18.95% p.a. depending on a number of factors including the amount borrowed, term, your credit rating and security offered.
Pioneer Finance Vehicle Loan

Pioneer Finance Vehicle Loan

Interest rate

From 11.95% (personalised)

Comparison rate

From 0.00% (personalised)

Repayment period

5 years

Application fee

From $270.00

Monthly repayment

$672.57

Total repayment

$40,354.20

Highlights

  • Get a loan with a low fixed rate that never goes up
  • Pay at your pace loan terms up to 7 years with payments weekly/fortnightly/monthly
  • Fast and friendly service

Overview

If you're in the market for a new car, chances are you will need a car loan to finance its purchase. You can also use a car loan to finance a used car. The key is to be sure of what you can borrow, and to work out how quickly you can pay off your debt.

A car loan works on the same principle as other types of credit. You take out a car loan through a lending organisation, such as a bank or the finance agent of the vehicle dealer where you buy the car. The company offers to lend you money to purchase the car and you agree to pay back the amount you have lent via monthly payments, plus interest. Unlike an unsecured loan, car loans are secured against the car.

A car loan is often one of the largest financial commitments after a home loan, so you should carefully consider the choices and understand what you're getting into before you sign on the dotted line.

So if you're setting up a car loan, read on. This guide to arranging your car loan is packed with tips to help you define how much you need to borrow, minimise your loan costs and help you compare loans effectively.

Learn about car loans

Answers to common questions about applying for and using a car loan.

  • Pros & cons

  • Tips

  • FAQs

A loan adds to the vehicle purchase cost

There's no getting away from the fact that, for example, buying a $20,000 car with a loan at 10% p.a. for five years is going to cost you around $26,770.

A set of wheels you couldn't otherwise afford

Not too many people can afford to buy a car outright from their savings. So a car loan is a great way to purchase a vehicle that may be essential for work, or family commitments, or just the pleasure of owning a better car than the one you have now.

Builds up your credit profile

Every well-managed loan, repaid in full and on time, will put a positive entry in your credit history and boost your credit score.

Lots of lenders means competitive rates

When there are many lenders competing for your business, which is the case with car loans, you're likely to get a better interest rate and lower fees.

Risk of repossession if you default on a secured loan

Failure to meet your repayments could result in you losing your car if the loan is secured on the car and the lender repossesses it.

You will still have to repay the loan if your car is stolen or written off

If your loan is secured your lender will almost certainly compel you to insure the car for its full value. But if the loan is unsecured and you lose your car, through theft or a serious collision leaving it beyond repair, you will still be liable for full repayment of your loan even though you may not have insurance to cover the cost.

Ask about early repayment fees

If your income increases, you may decide to pay off your loan before the end of the loan term in order to save interest and stop the irritation of monthly payments. For this reason, check to verify that your lender does not charge early repayment fees, otherwise you may be charged penalties for paying off your loan early.

Avoid high interest rates with a few preliminary steps

Interest rates on car loans can vary considerably, so shopping around is a must. The interest you are going to pay will be defined by a few factors, including:

  • Your credit history. If you've been successful at past repayments (credit cards, phones, loans, mortgages, &c.) you'll get a better interest rate than someone with missed payments or defaults. Checking your credit rating before applying is a sensible strategy. Given the amount you will need to borrow to purchase a car, your credit score could have a significant impact on what you will eventually pay in interest. Applying for your credit report is free from each of New Zealand's three credit reporting agencies and can give you an essential overview of your finances before you start to seek pre-approval.
  • Your deposit. If you want a loan of $10,000, it's better to have a $2,500 deposit than $0. The difference your deposit makes depends on the risk evaluation of the lender, but a bigger deposit typically means a better loan deal.
  • The model of the vehicle. You are likely to be charged a lower interest rate if the vehicle you are buying is a standard model, because there is an increased likelihood of quick resale if you default and the lender has to repossess and sell it.
  • The loan term. Think about taking a short loan period, as the longer the loan duration, the more interest you are going to pay overall. Interest rates on car loans can vary considerably, so shopping around is a must.
  • Secured loan. A car loan secured by the vehicle typically means a lower rate of interest. However, when you don't make the repayments, that means the lender will sell the car to recover the money owed.
  • Established relationship with lender. It is often easier to obtain cheaper loans if you have an established relationship with a lender. For example, a credit union may give its current members car loans with better terms. So, explore any current relationships you have with lenders to see if you can get a good deal that way.

Get pre-approval for a car loan

Once you find a lender with terms that you're happy with, a good next step is to have the loan pre-approved. This simply means the lender has provided you with a quote for the loan based on the information you provided and their initial assessment.

However, remember that pre-approval is not a guarantee. Recognise that even after getting pre-approval, a comprehensive credit check will still be carried out by the lender, which can lead to a hard inquiry on your credit report. If you're pre-approved for a loan, usually the lender will give you a letter of pre-approval to take with you when you go shopping for a car. You may then be able to use that pre-approval as a negotiating tool when deciding on a vehicle.

How to compare car loans

  • Consider your budget. Before locking yourself into a loan, make sure you know what you can and can't afford, to avoid putting yourself under an unnecessary financial burden. Figure out exactly what it will cost to buy your car. Take considerable time using a car loans calculator to wrap your mind around what the repayments are going to be. In addition, account for the expense of operating the car annually. Do not forget about fuel, registration, cost of servicing and miscellaneous expenses. Keep to the amount you want to borrow, and avoid any offer by the lender to advance you a larger amount. You made a budget for a purpose and you don't want to end up in greater debt or pay too much interest because the loan is significantly larger than either your budget or what you will actually need.
  • Work out how much the loan will cost you. You also have to consider the annual interest rates offered by different lenders to make an educated decision. The one with the lowest percentage is usually the better deal, and while fees to obtain and administer the loan will vary from lender to lender, the interest rate is the main factor in obtaining the best loan. But don't forget to compare loan application fees, any monthly or annual account-keeping fees, and any early repayment fees.

Make sure you never skip a payment

A missed payment is a significant event and can place a black mark on your credit file, making it harder for you to get any future credit or loans. You must make your monthly repayments regularly, or you may lose your car (with a secured loan) or face legal proceedings (with an unsecured loan).

Are there any extra fees payable on a car loan?

Interest is not the only cost associated with a car loan. There are also certain additional fees and charges. For example, some lenders charge a monthly processing fee on car loans, which can vary from $5 per month to $15 per month depending on the type of vehicle financing you apply for.

Also, expect to pay an establishment fee for setting up the loan, typically between $100 and $600. Some lenders also offer optional insurances or guarantees. These all add to the total borrowed amount.

It helps to always ask the lender to reveal all the fees and charges for the full repayment period. They should provide a single, cumulative dollar amount of what the loan will cost you. The point is to make sure you are not incurring a debt that you will find difficult to get out of.

Are there any restrictions on the type of car I can buy using a car loan?

If you're thinking about taking out a car loan, you may have in mind a specific car you'd like to buy. Not all cars are considered suitable by lending institutions when it comes to acquiring a car loan. The most common limitation is the age of the vehicle, because most lenders expect a used car to be no more than 12 years old at the end of the agreed financing period. This implies that if you decided to apply for a 5-year loan, at the time of purchase the vehicle cannot be more than seven years old.

Since these restrictions are only guidelines, lenders may be more forgiving based on the profile of the applicant and also on the type of vehicle. Some lenders will often finance exotic or antique vehicles for reasonably long periods if the applicant's profile is reasonable.

Can I apply for a car loan with bad credit?

It may seem that securing a car loan is unlikely with bad credit, but it is not. Individuals with poor credit are constantly getting accepted for car loans, and you can take steps to boost your chances of getting the funds and the car you need.

Having a large down payment, for example, will help you get your loan approved more easily. The down payment lowers the amount you owe relative to the value of the car, often referred to as the loan-to-value ratio.

You'll also need to demonstrate a regular solid income from employment, and that you have the means left to make loan repayments when all your current expenses have been met. It can help to show that you have been making regular deposits – however small – into a savings account, and that you have been paying your utility bills and home rental payments on time.

Can I buy new or used cars with a car loan?

You can apply for a loan to buy either a new or used car from a dealer, or a used car via a private sale. In the case of used cars, lenders prefer the vehicle to be not more than 12 years old at the end of the loan period, so this could place some restrictions on what you can buy and/or the length of the loan term.

Can I use a car loan when buying through a dealership or privately?

There are car loans available for both these situations.

How does a car loan compare with dealer financing?

Some car dealers may try to persuade you to accept their financing, but you may be able to find a better interest rate by comparing car loans yourself. The interest rate you pay via dealer finance may have the dealer's commission fee built into it, or you may be paying a higher purchase price for the car because you are being offered a finance facility. It's also possible that dealer financing may only be available on certain makes and models.

On the other hand, dealer finance may give you access to various financing arrangements, such as leasing, or loans with balloon or residual payments to reduce your regular monthly repayments. These options are not available with a car loan.

How long does it take for a car loan application to be processed?

An online application can be conditionally approved in minutes once you have completed and submitted the form, providing all your supplied information checks out and you have a reasonable credit score. The lender may ask for additional supporting documents before granting final approval, so it will depend on how quickly you can supply them.

For a secured loan, the lender will usually pay the car purchase funds directly to the dealer, or to the individual you are buying it from. Funds for an unsecured loan will be paid directly to the borrower, who is then responsible for purchasing the vehicle.

How much should I borrow to buy a new car?

It's generally considered a good idea to spend no more than 10% of your monthly pre-tax income on car repayments. For instance, if you earn $30,000 a year, this is about $250 a month. This leaves you cash for vital expenses and day-to-day items such as petrol, warrant of fitness, and car insurance.

Minimum amounts for car loans may also be set by individual lenders. If a loan is secured, lenders typically offer from $5,000 to $65,000, possibly more with some lenders.

What happens if I want to sell my car before the loan has been repaid?

If your loan is unsecured you can sell the car without any hindrance, but you must continue making your repayments until the loan is fully repaid. You could also pay out the loan in a lump sum if there is no early exit fee, or only a low fee to pay.

The situation is different if your loan is secured on the car. You will need to contact the lender and notify them of your plan to sell. They will explain to you your options for finalising the loan, and the amount required. Ideally, you need to pay off the loan before you advertise your car for sale, because no one is likely to buy a car with a financial encumbrance. You may need to repay your loan balance by using your savings, your credit card, or a new unsecured personal loan.

What loan terms are available?

Car loans are usually set at terms of between one year and seven years. Some lenders, usually providers of dealership finance, give you a set a loan term that comes with an inflated payment at the end. So if you're not using a regular car loan, verify if your standard repayments will pay off your loan entirely, or if at the end of the term you have to pay a larger residual or balloon payment.

What types of car financing are available?

There is a wide range of car finance solutions out there and these are distinguished by various features:

  • Secured car loan. The loan company uses the vehicle you buy as collateral for the loan when you opt for a secured car loan. If you default on your loan, the lender has the right to repossess the vehicle. Because this form of loan poses less risk to the lender, the rates for secured loans are typically lower.
  • Unsecured car loan. With an unsecured car loan, the lender will not be able to repossess your vehicle if you fail to make your loan repayments, . These loans come with a higher interest rate, however.
  • Car hire purchase. You also have the choice of financing your car through a car hire purchase system. In this case the lender owns the vehicle during the term of the hire purchase contract, but ownership transfers to the hirer once the last instalment and any final transfer fees are paid.
  • Car lease. You may also use a car lease to purchase a vehicle for business purposes. The lender buys the vehicle, and you make lease payments regularly as agreed until the contract is concluded. A vehicle lease can give you the option to buy the vehicle for an agreed residual value at the end of the lease term, or you may opt to return the vehicle and enter into a new lease agreement for another vehicle.
  • Chattel mortgage. Suitable for businesses and the self-employed, a chattel mortgage lets you take ownership of the vehicle immediately (which has business tax advantages) while the lender retains a registered interest in the vehicle until the final instalment is paid.