There is a lot of advertising from many car manufacturers offering really cheap interest rates, below 3%, on car loans. What most people don’t know until they get into the dealership is all the restrictions and criteria they’ll have to fulfil in order to obtain these super low interest car loan rates. In the majority of cases the manufacturers are using mainstream automotive financiers, as there are only a few manufacturers left that have their own finance division. If you read in the fine print, the disclaimer should advise who the lender is and in some cases they are some of the major banks.
Now if these banks actually could offer loans at rates below 3% and profit, then why aren’t they offering lower interest rates on home loans, personal loans, credit cards or even car loans directly through them? The answer is quite simple, there are catches and the banks cannot afford to offer these rates directly, so their losses need to be recouped somehow. You need to proceed with caution and weigh up all options before impulsively purchasing on interest rate alone. The financier must be paid back somehow for any lost interest from the manufacturer or the dealership, and the manufacturer or dealership must be getting this money from somewhere, which is why the most common restriction on these types of promotions are that the price of the car is not negotiable, or can only be negotiated down to a certain limit.
The financier must be paid back somehow for any lost interest from the manufacturer or the dealership, and the manufacturer or dealership must be getting this money from somewhere.
Overpaying for a car, just to get a low interest rate can cause problems. Most people are aware that when you buy a new car and drive out of a dealership, the value has declined straight away, not only due to becoming a used car, but also when purchasing a new car, you would have paid on road costs, government charges and also dealer delivery, which add no value to your new purchase. If you want to payout your loan early through trade in of your vehicle, without overpaying for your car, you could have a shortfall between your loan payout and the value of your car, referred to as “negative equity”.
This shortfall would be inflated when overpaying for a vehicle just to get a low interest rate, so keep it in mind prior to reviewing all options available. Other common criteria would be restrictions on how many years you would like to do the loan, as the shorter the term, the less interest the manufacturer or dealership is losing, or they may request a large cash deposit and these criteria may not be suitable for your own budget which you may have had in mind.
In many cases, it may be cheaper and less restrictive to negotiate the car and finance separately. One of the best ways to compare apples with apples, is to find the cheapest price for the car (a good car buying service such as the CarLoans.com.au Car Buying Service can assist with this) and then find the best finance deal outside of the super low interest rates on offer and compare the payments with the same terms (e.g. same deposit, same term of loan, etc) on the negotiated finance and car price against the “all-in-one” dealership offer with the low rate and see which option has the cheapest repayment.