Why low-interest car loans aren't always a good deal

February 02, 2016
Melinda Halloran

Need a new car but don’t have the money? Like credit cards, car finance is getting even easier to access, but some deals are just too good to be true.

Much to the surprise of many consumers, most no-interest and low-interest car loans end up costing a lot more in the long run. If a car dealer isn’t charging interest on a loan, it’s more than likely they are making money in other ways.

The hidden catches of no-interest and low-interest car loans

1. Increased drive-away prices
To counteract the low-interest deal, many car dealers will increase the price of a vehicle. So while you get a great interest rate, you may be paying more than the car is worth. Accessing an alternative source of finance will give you more bargaining power, which could save you more than the cost of standard interest payments.

2. Higher fees
If the price of the car hasn’t been inflated, chances are the loan fees have been. To ensure you are getting a fair deal, check how much fees and other charges will cost over the life of a loan.

3. No loan flexibility
These types of loans offer little flexibility in terms of making extra repayments and balloon payments, and setting the term of the loan. Other lenders may be able to provide you with a greater degree of flexibility and more loan features.

4. Lower trade-in prices
Using dealer finance gives you less bargaining power, which also extends to trade-in vehicles. When taking advantage of no- or low-interest loans, you may find that you are offered a lower price for your existing car.

Deferred repayment loans

As well as no-interest car loans, you should also be wary of loans offering deferred repayments. While you may not have to make any repayments for the first year of the loan, it is often the case that interest starts accruing from the day you sign the contract, costing you more money in the long run.

How to get the best deal on a car loan

While it may be tempting to take advantage of a limited-time deal, it does pay to do your homework before signing on the dotted line. To compare loans, ask your dealer as well as external lenders how much their respective loans will costs over the life of the loan. It may work out that the 0% interest rate is in fact the best deal for you, or the numbers may swing in favour of another lender. Whatever the outcome, you’ll be able to enter into an agreement knowing you’re getting the right deal for your situation.

It is also worthwhile investigating whether discounts are available for cars that aren’t purchased with finance. You may find it cheaper to negotiate a better price on the car and arrange your finance separately. 

Finally, research the market value of the car you are purchasing as well as that of the vehicle you want to trade in. This will give you the insight you need to bargain a better price, or to reject a costly finance offer.

Car loan options

When approaching external lenders, these are the loan options you can consider.

Secured car loan: These loans generally have lower interest rates than personal loans, as the car can be used as security. Lenders will need to confirm the suitability of the vehicle before approving the finance and accepting your deposit. Secured car loans are most commonly fixed-rate loans that offer little flexibility in terms of extra repayments.

Variable-rate personal loan: Personal loans can be used to purchase cars and variable-rate loans give you greater flexibility. You can make extra repayments to save on interest and pay the loan off faster, and there’s also the option to redraw funds if necessary.

Fixed-rate personal loan: If you need to use a personal loan to purchase a car, a fixed-rate loan will give you the benefit of repayments that won’t fluctuate even if interest rates rise.

Comparing your options 

Reading the fine print of each loan can be difficult, especially when loans have different fees, terms and conditions. Explain your situation to a lender for guidance or bring your loan options to me and I’ll be happy to talk you through each one. By making an informed choice, you’ll be able to purchase a vehicle confident that you’ve found the best loan. 

Are you an attractive borrower?

Luke Cashin
0419 733 862

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Posted in: Car loans & leasing

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