Personal car loan repayment options can affect the amount of interest that you pay as well as the length of the loan. While the payment plan is usually outlined before you even apply for finance, often there are several ways to pay off your shiny new car, each with different pros and cons.
Monthly repayments are the most common option for personal car loans, with lenders using this standard to estimate repayments, interest costs and more. With so many other banking fees due on a monthly basis (such as mortgage and credit card payments), making one payment a month is also considered a convenient option for many consumers.
It is not the only option, however, with some lenders also offering repayment schedules on a fortnightly or even weekly basis when these options are requested. This article explains the differences between each car loan repayment option to reveal how they can work well for different people.
On This Page
- Monthly car loan repayments
- Fortnightly car loan repayments
- Weekly car loan repayments
- Additional and balloon payments
- How to choose your car loan repayment plan
- Conclusion: Budgeting for car loan repayments
As mentioned above, monthly car loan repayments are the industry standard. They make it easier for lenders and consumers to estimate costs and interest, and mean you only have to make repayments on your car 12 times a year.
As MoneySmart explains, most car loans with monthly repayments also have fixed interest rates, where the amount you pay is locked in for the entire loan term.
“A fixed rate loan offers the benefit of set repayments, so you know exactly how much you have to pay each month,” it says.
For example, MoneySmart’s car loan calculator outlines that a car loan of $20,000 with an interest rate of 13% p.a. and a five-year term would have monthly repayments of $455, to a total of $27,304 over five years. Considering this repayment amount before applying for a car loan could help you compare lenders and loans, reduce the loan amount or lengthen the loan term. Whatever you decide, it is easy to budget for this kind of repayment because you know exactly how much you will pay each month in advance. As a result, monthly car loan repayments are a great option for people with financial stability and an ability to budget for several years ahead.
Otherwise, MoneySmart warns that there is a catch with the certainty of monthly repayment options: “if you make extra payments from time to time and pay out the loan early, you may be charged an early termination fee.”
The fees that come from early termination or variation to the repayment terms already agreed upon can make a huge difference to the cost of your car loan. So while monthly repayments are the norm, it is a good idea to consider how they will fit in with your lifestyle before you lock them in.
This option means that you typically make two car loan repayments a month, and about 26 repayments a year. With fortnightly car loan repayments, many lenders simply halve the monthly repayment amount, which means each repayment is smaller and potentially easier to deal with.
This structure also means you actually pay slightly more over the year and save money on interest as a result. So with the car loan scenario above, opting for fortnightly payments means you would repay $210 every two weeks, to a total of $27,247 over the five-year term – $57 less than if you made monthly repayments.
But with this repayment option it is important to remember that lenders all have their own ways of working out repayment amounts and schedules. As the home loan website MortgageTips.com.au explains: “Lenders are free to do whatever they like” when it comes to recalculating costs for fortnightly repayments.
For instance, if a lender calculates fortnightly repayments based on the number of months in a year, rather than based on the monthly repayments, you may not actually save any money.
In general, fortnightly repayments are popular among the frugal-minded, but also a great option for people whose wages are based on a similar schedule – when payday comes around you can transfer the money for your car loan straight away and not be left with a larger amount owing at the end of each month.
Paying of your car loan on a weekly basis also has the potential to save you money on interest because of the frequency of repayments. The amount you pay each week could also seem more manageable than one or two larger sums, and fit better if your wages are paid on a weekly basis.
With the hypothetical $20,000 loan discussed above, opting for weekly repayments would see you repay $105 at a time, to a total of $27,223. That amount works out to be a saving of $81 on monthly repayments and $24 on the fortnightly option. While it may not seem like much of a difference over the life of a loan, the $81 is almost a whole week’s payment in itself, which really highlights the difference between these three repayment options.
Like fortnightly repayments, the exact amount of money you save by making weekly repayments depends on the lender’s calculations, so it is important to compare different loans and find out how each car loan repayment option works.
Most lenders give you the option of making additional repayments on your car loan. These payments are complementary to the monthly, fortnightly or weekly options, and could be worth more or less than them.
Making additional payments should, in theory, reduce the overall cost of a loan and could even cut down on the loan term. However, there are usually fees for additional payments, as well as early exit fees.
“If you decide to make repayments in advance or pay out your loan before the completion date, early repayment charges will apply,” ANZ says in a guide to secured car loans.
“Your decision may be affected by the amount of interest you may save, along with possible insurance savings and other benefits, versus the cost to break the loan.”
The value of making additional repayments, then, is dependent on the specific terms and conditions of your car loan.
If you think you will be in a position to make additional repayments in the future, ask lenders about this possibility before you apply for a loan so that you can pick a car finance option that is flexible about extra payments. Alternatively, you can factor in the fees that come from additional repayments so that they do not affect your budget.
Balloon payments are another car loan option that can make your repayments more affordable. A balloon or residual repayment is a larger sum of money that’s usually due at the end of a car loan term and can make the regular repayments more affordable and easier to manage over the life of the loan.
For example, if you were buying a $20,000 car, you could request $15,000 in finance and a $5000 balloon payment due at the end of the loan. That would reduce your interest costs and/or the term of the loan, but would also mean that you have to pay $5000 upfront when the loan term comes to an end.
This condition makes balloon payments ideal if you have some money set aside for car finance, or if you know you will have other means of getting the lump sum by the due date.
But as the Commonwealth Bank points out, sometimes balloon payments can skew the rates you see advertised for difference car finance options. The bank suggests asking lenders about balloon repayments so that you can consider how you would pay for one if you decide to go down this route.
It is one thing to learn about different car loan repayment options, but another thing to decide what type of payments will work best for you. All of the repayments outlined above are valid options with the potential to make a car loan both affordable and convenient.
The key, however, is to figure out how each car loan repayment option would fit in with your current lifestyle. You can figure this out by considering the following points:
- When do you get paid?
- How often do you pay other bills?
- What is your bank balance like at the end of a week, fortnight and month?
- Do you prefer to plan ahead or deal with things straight away?
- Do you have money you can put towards the cost of the car?
- Would you be able to make regular repayments and also save money (for a balloon payment) at the same time?
- How likely is it that you would want to pay off you car loan faster than the term suggests?
Asking yourself these kinds of questions can help you figure out how you already manage your money and, in turn, what kind of car loan repayment option would work well for you. It’s also useful to discuss different repayment options with lenders before choosing a loan. Explain to them your current circumstances and money management strategies so that they can work with you to come up with a payment plan that is easy to follow – after all, it’s in their best interest too.
Learning about different car loan repayment options means that you can make a much more informed decision about how you finance your next car purchase. So after you have chosen a repayment plan you think will work for you, it’s just a matter of factoring it into your budget.
Using a car loan calculator can help you plan for your repayments – whether they are monthly, fortnightly or weekly. Similarly free personal finance resources like the MoneySmart Budget Planner puts these payments in perspective for the rest of your finances over both the short and long term.
“When you put together your budget, include all the costs of owning a car,” MoneySmart advises.
“These are annual registration fees, insurance, roadside assistance, petrol, repairs, maintenance, even road tolls.”
Depending on the lender you choose, you could also have access to other financial tools that make it easier to manage car loan repayments. Most banks, for example, offer automatic direct debits that you can set up at the start of the loan so that the money comes out of your account whenever it is due.
This “set and forget” method reduces the risk of late payments and means that you barely have to think about when your car loan repayment is due (providing you have enough money in your account).
Although it can seem easier to stick to the types of car finance advertised by lenders, learning more about all the car loan payment plans available and considering how they will or won’t work for you is a smarter way to approach things.
“Apart from a home, a car is one of the single biggest purchases you are likely to make,” MoneySmart explains.
“Don’t let the thrill of buying your own set of wheels get in the way of making good financial decisions.”
Just as there are many different car loan providers, there is a wide range of car loan repayment options. This variety means that you do not have to “fit” a car loan into your life, but can find an option that really works for you.
So whether you are currently considering buying a car or know it is an option in the future, considering these different repayment options and how they would fit with your lifestyle means that you will be better able to manage a car loan when you need one.