Are Low Interest Car Loans the Cheapest?

Global interest rates have been at record lows for nearly a decade following the global financial crisis that heavily affected the US housing market and the European financial market.

While Australia was not hit hard in the crisis, our economic growth has remained slow in the wake of the collapse, and interest rates have been held at a record low for 21 months.

• Here's more about how RBA rates affect car loan rates.

It is anticipated that interest rates will begin to rise again as the global economy and the Australian economy experiences steady growth. When this happens, car loan rates will increase too.

How important are low car loan rates?

Low car loan rates are desirable in general, as it means you pay less to borrow the money needed for the car purchase.

• Read more to learn: what is a low interest rate for a car loan?

There are some things to look out for though.

Think of getting the right car loan like buying the right sofa. You might find a perfect sofa in the store, but you buy it only to find out that it's too big to fit into your living room, it's not the right sofa for you. So you need you to consider more than just one aspect of the decision.

The following situations can trap you into a low car loan rate and low repayments where the loan has other fees or disadvantages:

Chattel Mortgage

A chattel mortgage is a secured car loan that has low interest rates and low repayments.

Be aware that a chattel mortgage also often comes with a balloon payment. This is a lump sum due at the end of the loan term. There are a few things to be aware of here:

• You pay interest on the amount of the balloon in your car loan repayments.
• Your payments are lower, but if you don't have the funds to pay out the balance, you'll need to refinance or sell the car. Make sure that balloon is in line with the anticipated depreciation of the car, so if you trade it in, there's not a gap to pay.

Factoring in these points, a chattel mortgage might still be a great option if you use the car for business 50 per cent of the time or more as the loan has advantages like flexible repayment options.

You can find out exactly how a chattel mortgage with a balloon payment works here.

Dealership finance

Getting your car finance at the dealership is the easy option, especially if you're buying a new car, and it's the option that one-third of Australian car buyers took in 2016. However, there's a couple of things to watch out for if you take this route:

• A specific deal on finance may be tied to a certain car model, such as a plate clearance model.
• You might have less ability to negotiate the purchase price of the car - the dealer has to make a cut somewhere!

Here's more information on getting dealer finance and especially when 0% finance offers are good, and when they can be a trap.

Limited purchase options

Secured car loans require that you purchase a car that's less than seven years old. If you're buying second hand, you may find an older car that fits your needs and costs a little less.

In this circumstance, you might be better off getting an unsecured loan to borrow a smaller amount to buy the older car. The interest rate will be a little higher than for a secured car loan, but you'll spend a lot less in total.

Hidden fees and charges

While the credit regulation laws require that lenders and brokers advertise using a 'comparison rate' which includes account keeping and application fees, this figure may not include early payout fees and other costs that only occur in specific situations.

Make sure you compare not just the low car loan rates, but the terms of the loan and options if you need to finalise the contract early to get the ideal car loan.

Using Mortgage Redraw to Buy a Car

Home loans have some of the lowest loan interest rates around. The trap here is that you could potentially be borrowing your car purchase price over 30 years when you redraw on your mortgage to purchase a car.

• Should I roll my car loan into my mortgage? Read on to see how a $30,000 car could cost you $77,710.

Before you make the decision to roll your car loan into your home loan, make sure you have a system in place to ensure you aren't caught by the trap of compounding interest - and end up paying a LOT more than you intended for the car.

Get expert advice on the right car loan

The best way to minimise your interest costs, and the total cost of your car finance, is to make sure that you get the best available product for your requirements.

A car loan broker can assess your individual financial profile and make recommendations on where to find the best low interest car loans for you, as well as other important loan features that will make your car loan fit.