Understanding Car Loan Interest Rates in New Zealand

If you’ve borrowed money to buy a car, the interest rate on your loan can play a major role in how much your vehicle really costs you. But in the excitement of finding a new ride and organising the loan to take it home, some people overlook the interest rate they are paying.  Here, we will explain how car loan interest works in New Zealand and what you need to know to find a loan that is appropriate for your circumstances.

But this can mean you have higher loan repayments, which use up more of your weekly budget. Here are some tips to repay “bad credit loans” – whether it’s a personal loan, car finance or other lending - and get back on the right track.

What is a car loan interest rate?

In simple terms, your interest rate is the extra bit that your lender charges you for borrowing money, over the time that you are repaying the loan. If you borrow a sum of money, you are required to pay that back in full, plus a bit more.

Because car loans tend to be paid back over a period of at least a year or two, even a small difference in the interest rate can mean quite a significant variation in how much you pay over time. The interest paid is part of the total cost of the loan, but not the whole thing. There may also be establishment fees and annual or monthly administration fees to be aware of, as well as others, such as early repayment fees.

How is car loan interest calculated in NZ?

It works a bit like this. Say you’re borrowing $25,000 to buy a car and you’re going to pay back the loan over five years. The lender needs to make some money from this transaction to compensate them for lending you money. They might charge you 12 percent a year in interest.

That means you pay back the principal you are owing, plus the extra required to cover that interest bill.
Usually, you’ll find that your repayments in the early days of your loan are made up of more interest and less principal repayment, meaning your total owing is not reducing as much as the total payments you make. Over time, though, that changes.

better finance™️ has a car loan calculator online that shows a $25,000 loan over three years with an interest rate of 14.95 percent would cost $206 a week in repayments and have a total cost of $32,184, including establishment and introducer fees of $820. If you paid back the loan over five years, your weekly repayments would drop to $142, but the extra time it took to clear the loan, and the interest charged in that period, would mean a total cost of $36,840.

Fixed vs variable car loan interest rates

better finance™️ generally works with lenders who offer fixed interest rates for the term of the loan, but it is possible to borrow money with either a fixed or a variable rate. Fixed interest rates often suit borrowers because it means that your repayments are predictable. You know what you will have to pay each week or month, and there is no chance of a surprise change in the rate to catch you out. You also have protection if interest rates start to rise.

Variable interest rates can be an option if you are in an environment where you think rates might fall and you want to be able to benefit from that. There is less repayment certainty. The better finance™️team can help you to think about what might be suitable for you.

What factors affect your car loan interest rate?

There are a few different things that can affect the sort of interest rate you might be offered by a lender for your car loan.

Your credit score and history

Sometimes, you may be offered a lower interest rate if you have a good credit score and good credit history than would be offered to a borrower with a poor credit history. Lenders usually look at these as positive factors that will make it more likely that you’ll repay your loan.

Income stability and employment type

Lenders like to see stable income. If you have variable income or are in a contract or self-employed work situation, it may mean that you are a slightly riskier proposition, and you might be offered higher interest rates as a result. We can help you to look at your options.

Deposit size

Sometimes, having a larger deposit can also make a lender feel you are a safer option. Deposits aren’t always required, though. We can chat to you about what might be possible.

Whether your loan is secured or unsecured

Lenders generally charge higher interest rates for unsecured loans because there is less surety for them if the borrower defaults on their repayments. When a loan is secured, they could sell the security (usually the vehicle in the case of a car loan) to recover some or all of what they are owed.

New or used vehicles

It is sometimes the case that people buying new vehicles are offered promotional finance deals that lower the interest rate offered on finance.

How do lenders set car loan interest rates in NZ?

Most buyers who take loans for their vehicles either do it through the bank, a finance company or via a dealer finance arrangement. Generally, lenders offering car loans have risk-based pricing. They generally charge higher rates on loans to borrowers who are riskier. You can lower your perceived risk by offering security on the loan, improving your credit history and having evidence of stable income.

You might see loan rates advertised as being “from” a certain level. This does not mean that all borrowers will be able to access the advertised rate. The team at better finance™️ can help you to look at what is available in the market and what might be suitable for your situation.

Secured vs unsecured car loans and interest rates

You’ll probably notice that unsecured loans usually come with higher interest rates than secured loans.  There is a simple reason for that – they can be a lot riskier to the lender. When you take out a secured loan, you offer an acceptable asset as security to the lender. They can then use it to recover any amount you owe if you stop making repayments on the loan. When you are buying a car, it is usually the vehicle itself that is used as security. When the loan is repaid, the security interest is removed.

When the loan is unsecured, you may pay a higher interest rate, but if you stop making repayments on the loan, the lender cannot take your vehicle. They will still pursue you for the amount owing, though, and any default can count against you in future if you apply for other lending.

Dealer finance interest rates explained

Some car dealers have arrangements with lenders that allow them to help their customers take out loans. Often, the dealer will act as an intermediary, taking information and submitting it to a third party to process the loan application. These can be a convenient option, but it’s important that you compare what you might be offered to what else is available and choose a loan that works for you.

How does loan term length affect interest paid?

Because interest is paid over the length of your loan, the longer it takes you to pay back, the more total interest you will pay. Shorter terms mean higher repayments but less overall interest charged, and therefore usually a lower total cost of borrowing. Longer loan terms usually mean lower weekly or monthly repayments but more interest because the loan sticks around longer, and a higher total cost of borrowing.

When you’re deciding on the loan term that works for you, you’ll need to think about the cashflow considerations of the size of your monthly repayments, offset by the total cost of your loan. Is it more important to you to have lower regular payments or to pay a lower cost associated with your loan overall?

We can help you weigh up your options.

Costs that increase the effective interest rate

There are a few other things to think about that might increase the cost of your loan.

Establishment and ongoing fees

It’s likely that you’ll be charged a fee when the loan is set up, and potentially on an ongoing basis, too. This should be made clear to you at the outset.

Early repayment charges

Some lenders will charge you a fee if you want to pay back your loan early. Understanding what this is can help you to calculate whether it is worth doing.

Add-ons added to the loan

If you add additional charges to your loan, such as warranties or other insurances, it may increase the amount you borrow and the overall cost of your loan.  You may find that the lender with the lowest interest rate is not always offering the ‘cheapest’ loan overall, because of the other fees charged. It is important to compare the full picture

Tips to get a lower car loan interest rate

Want to give yourself the best chance of a low interest rate?

Improve your credit profile 

Work on lifting your credit score and improving your credit history to make your application more appealing to lenders. You can check your credit history and make sure there is nothing incorrect in it. Tackle any defaults that might be outstanding.

Save a deposit 

It may help to save a deposit to offer as part of the car purchase.

Choose a realistic loan term

Work out what loan term is likely to be optimal for you and compare the options available with those settings.

Compare lenders 

At better finance™️, we will do this for you. Considering a range of options helps to find a great fit.

Consider preapproval first

Knowing what you can borrow before you go car shopping can put you in a strong position.

Common myths about car loan interest rates

Frequently Asked Questions (FAQs)

What is a good car loan interest rate in NZ?

Interest rates can vary a lot depending on the lender offering them and the borrower’s circumstances.  What is “good” depends a lot on your situation. We can help you to work through your options.

Can I negotiate my car loan interest rate?

You may be able to. The better finance™️team can help.

Do interest rates differ for new and used cars?

Sometimes, there are finance deals offered for new cars that might not be available for used options.

Can refinancing lower my interest rate?

Sometimes - but it’s important to do this carefully because there may be early repayment fees involved. We can help you to work out whether it’s a good option for you.

Does paying extra reduce interest?

It can do so, but it’s important to check that any fees you’re charged for early repayments don’t outweigh the interest savings.

Do you have questions?

If you have any questions about borrowing for a car, wedding, holiday, or anything else you might need funds for, get in touch with the team at better finance™️. We’re experts when it comes to personal loans and can help you through the process.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.