Car Loans at near Home Loan Rates
You've got your eye on the dream vehicle. The salesman’s got you in his grasp, pen in hand. "Just sign here", he says giving you a personal loan so the vehicle can be yours to drive away in a few days.
What's wrong with this picture?
Nothing's wrong with the car, it’s what is going on with that car loan. Car dealers deserve to make some money on cars they sell. But padding the loan interest rate so they can make as much money off you as possible, is going too far.
What many people don’t realise, is that a car loan or other secured personal loans can most of the time be obtained for a very small margin above the home loan interest rate. That's especially true for a homeowner purchasing a new or late model car.
In other situations, a car manufacturer will offer extremely low-interest rates on loans for a new vehicle, but then they are very limited to providing a significant discount. By getting your own loan and offering the equivalent of cash, they will often bring the price way down, making the deal better than if you paid no interest on the loan.
Here at Grace Loans, we look after your interests. That includes personal loans, car loans, RV loans - and the list goes on.
So what’s the best approach to getting a car loan?
Here are some quick tips on how to get the best deal on that next car or other vehicles you buy:
- Do your serious shopping near the end of the month. The salesperson is likely to have a monthly quota and will be keen to do a deal to get yours across the line.
- In preparation for that at the start of the month, get pre-approval for your vehicle loan - something we can obtain for you. So you can shop with confidence knowing exactly how much you can spend.
- Use the magic words: "I would like to buy a car today. And I'll be paying cash. Also, I would like to take delivery before the end of the month." How can you say that when you are going to get a loan?
- Why does paying cash help? Often the dealer will be offering some sort of reduced interest rate loan, or even interest-free finance. That isn't free - they need to build it into the price of the vehicle. With you paying cash they can go even lower.
- Sharing that you want to take delivery before the end of the month triggers the 'monthly quota' thinking in the mind of the salesperson.
Car Loan FAQs
How much can I borrow?
The number one most asked question, with an answer that’s different for each person. Because it's all depending on what your income is and the value of the property(ies) that you have to use as a security for the loan. (See the answers for "Serviceability" and "LVR" below)
What is a "LVR"?
LVR stands for "Loan to Value Ratio." It’s calculated by dividing the loan amount by the value of the securities involved. Lenders limit the amount you can borrow according to this LVR rule. Generally, most people can borrow up to 80% LVR (that’s 80% of the value of the property) without penalty. In some cases, by paying for "Lenders Mortgage Insurance" (See "LMI" below) up to 95% can be borrowed, or even 97% where the cost of the LMI becomes included within the loan amount ("capitalised LMI").
What is "serviceability"?
Your ability to generate enough income to cover loan payments is described as "serviceability." Each bank has its own way of calculating how much income you need. The interest rate will be higher than present rates in the calculation to allow for rates going up in the future causing undue stress on your financial situation. Credit cards and loans not being refinanced will have payment amounts increased to cover the amount owing as if the facility was fully drawn. That means that if you have a credit card with a very large credit limit it will be harder to qualify for a loan.
Part of the equation that most people ignore is what they spend their money on. With your broker being required to make reasonable enquiries into your spending, including examining bank accounts, to verify your estimates of your living expenses. While the banks will have minimums for each family situation, they want it to be adjusted upwards to match your particular situation. Where you have obligations such as insurances, pay TV and club memberships, those amounts will all need to be added on top of their minimums or your other normal living expenses.
What is "LMI"?
"LMI" is "Lenders Mortgage Insurance." This insurance doesn't protect you, it protects the lender. Many lenders will ensure all of their loans, only passing this cost to you when you’re over 80% LVR (see LVR question above). A few lenders will go up to 85% LVR without charging you for LMI, and several of the major banks will allow up to 90% LVR for certain medical professionals.
LMI costs vary according to the LVR and amount borrowed. With slight variations from one lender to another. It's not unusual for a borrower to be charged something on the order of $10,000. Part of your mortgage broker's preliminary assessment will be to provide an estimate of what the LMI charge will be for the recommended lender. Your broker should also be able to show you how the LMI varies from lender to lender in your particular situation.
Is loan interest tax deductible?
That's a great question, to answer that you’ll have to head over to GraceFinancial.com.au, our financial planning website, and learn more about tax-deductible investment expenses there.
What documentation do I need to provide to apply for a loan?
It varies slightly from bank to bank, but for PAYG income earners this would be typical:
- Your last two payslips
- Your last Notice of Assessment (Find it at MyGov - ATO) or Group Certificate (from your employe)
- ID verification with Drivers Licence & Passport or Birth Certificate + proof of change of name, if applicabe
- Medicare card
- The last six months of statements for all transaction accounts and credit cards
- Rates statements for existing properties being used as security
- The contract for properties being purchased (unsigned but with purchasers' names and purchase price)
For self-employed borrowers, generally you’ll need to have your ABN for two years, and most lenders want two years of financial reports, tax returns and Notices of Assessment too.