Car Loan Fees and Charges Explained

Get the lowdown on car loan fees - our guide breaks down everything from setup costs to late payment charges and shows how interest affects these fees.

Updated 15 February 2024

Summary:

Fees and charges are common in car loan contracts and are additional costs in addition to the interest you pay.
They can include processing fees, late payment penalties, or early repayment fees.
Most car lenders will quickly charge you fees should you give them a reason to, so understanding what you may be charged is essential.

Examples:

Reasonable Fees: A typical establishment fee might range from $150 to $600. This fee covers the administrative costs of setting up the loan.
Excessive Fees: Be wary of establishment fees exceeding $750 or significant ongoing monthly administration fees (for example, $25+ a month or $200+ a year), as these can be disproportionate to the service provided, and the lender is already making money from interest charges.

Common Fees, What They Mean and the Frequency of Charges:

1. Establishment Fee:

What it is: This covers the administrative cost of processing the loan application and setting up the loan account. It's a fee almost always included in a car loan contract.
When it's charged: Typically, it is a one-time charge at the start of the loan. The fee will be added to your loan balance, so you'll pay interest on it. For example, a $500 establishment fee on a five-year loan with a 15% interest rate will cost a total of $712 to repay, per our car loan repayment calculator (LINK).

2. Late Payment Penalties:

What it is: These fees are charged when a repayment is made after the due date. The amount varies but should be reasonable and reflect the additional administrative cost to the lender. Depending on the car loan contract, it may be a fixed fee or an increased interest rate.
When it's charged: These will be charged each time a payment is late, depending on the lender's policy. They could be fees, penalty interest rates, or both. The financial consequences of late payments can be significant and quickly grow your total debt, which adds financial stress.

3. Monthly Administration Fees:

What it is: This covers ongoing account maintenance. These should be minimal, for example, $5 to $10 per month.
When it's charged: As the name suggests, this is charged monthly throughout the loan's term. It's added to your loan balance, and ongoing payments will be offset against it.

Our view: Given the profits that can be made, some car lenders have a (well-deserved) reputation for loading their contracts with fees and charges. This increases the total cost of the loan and risks financial strain from unanticipated fees.

The impact of fees on loan costs over time:

Small fees, like monthly administration charges, can significantly add up over time, increasing the total cost of the loan.
For example, a $10 monthly administration fee totals $120 per year, significantly inflating the overall cost over a multi-year loan term.
Throughout your car loan, you're paying interest on these fees as they get added - our total cost of car loan fees calculator (LINK) explains what these can cost when you factor in your interest rate and loan term.

Overall, a good car loan contract features:

A clear listing of fees, including establishment fees, monthly administration fees, and other charges.
Reasonable costs compared to industry standards.

We believe a bad car loan contract features:

Hidden or unclear fees (and, unfortunately, this can be common).
Excessive charges that are disproportionate to the loan value or compared to market rates, for example, a 10% penalty interest rate for late payments or a $25+ monthly administration fee.

Understanding Car Loan Fees - Our Suggested Next Steps:

If you don't understand the fees or when they apply, ask the lender until you're comfortable. Fees make car lenders a lot of money, so you need to be comfortable with every fee the contract lists as you will pay them. Our list of questions below is a useful starting point.
Look at real examples of the fees and charges sections in car loan contracts from lenders such as X and X below.
Watch our video overview: Car Loan Expert Founder Christopher Walsh explains the fees and charges lurking in car loan contracts in the video below: LINK
Read our case studies below to understand more about fees and charges in practice.

Getting transparency around fees and costs - questions you can ask:

Ask for a complete breakdown of all fees and their specific purposes. Fees are high risk, and you need to know exactly what you're signing up for.
Inquire about the frequency of ongoing charges (like administration fees). They must be factored into your ongoing repayments so you can budget correctly.
Question the lender about the conditions under which late payment penalties apply; is there a period of grace (e.g. 1-2 days where you can be late without penalty)?
Clarify if any hidden or additional costs might arise during the loan term - this is important as borrowers continue to misunderstand.

Car Loan Fee Example Case Studies and Scenarios:

Scenario 1: High Establishment Fee

Situation: Emma takes out a $20,000 car loan with an establishment fee of $600 and a $12 monthly administration fee at an interest rate of 10% over a 5-year term.
Impact: The establishment fee and monthly fees add to her loan principal, increasing the amount on which interest is calculated. Over five years, Emma pays significantly more due to these added fees, not just in terms of the fees themselves but also the additional interest that gets added on.

Scenario 2: Frequent Late Payment Penalties

Situation: David has a $15,000 car loan with a 15% interest rate. He frequently incurs late payment penalties of $50 and penalty interest on top of that for the days he's behind in his payments.
Impact: These penalties not only add to his immediate loan cost but, if added to the loan balance, also accrue interest over time, substantially increasing the overall loan cost. This makes the loan more expensive and ongoing costs higher.

Finally, Car Loan Expert Founder Christopher Walsh offers must-know tips for understanding and navigating the fees and charges in car loan contracts:

Evaluate Loan Fees Carefully: Always compare loan fees from various lenders. Don't just look at the interest rates; scrutinise the fees. If a fee seems unusually high, question it. Remember, what seems like small fees can add up significantly over the loan term, especially given interest is charged on the fees.
Negotiate Your Loan Terms: Don't hesitate to negotiate the terms of your loan, including fees. For instance, if you have a strong credit history and affordability, you might be able to get a lower establishment fee or even get some fees waived. Lenders are often willing to make concessions to secure your business - the stronger your financial position, the greater you can bargain.
Understand Your Contract Thoroughly: It's crucial to read and understand all terms in your loan contract. Pay special attention to how late payments are penalised, the implications of paying off your loan early, and any hidden fees. If there's anything you don't understand, ask the lender to explain.
Consider the Long-Term Cost of Fees: A fee that seems small upfront can grow due to compounding interest over the life of the loan. Use our car loan calculator LINK to understand the full loan cost, including fees.

Remember, being informed and prepared gives you the power to make better financial decisions. By understanding and managing the fees and charges associated with car loans, you can save money and avoid burdensome debt. Too many New Zealanders take on car loans and struggle with fees and penalties they don't understand, as this Stuff.co.nz article from November 2020 explains.

Empowering yourself with knowledge is key to navigating car finance successfully and avoiding what can, for some, become 'poverty loans.'

Frequently Asked Questions

What are the most common fees in car loan contracts?

Common fees include establishment fees, monthly administration fees, and late payment penalties. Establishment fees cover the cost of processing your loan application. Monthly administration fees are for ongoing account maintenance. Late payment fees are charged when repayments are not made on time and can vary in amount.

How can I tell if a fee is excessive?

A fee is considered excessive if it's significantly higher than the industry average. For example, an establishment fee over $750 or monthly administration fees exceeding $25 may be considered excessive. Research and compare different lenders to understand the standard fees in the market to make a fully informed decision.

Are there any fees that I can negotiate or avoid?

Yes, some fees are negotiable, especially if you have a good credit history. You can negotiate the establishment fee or request the waiver of certain charges. Avoiding late payment fees by ensuring timely repayments and setting up automatic payments is possible.

Can I get a refund on any fees if I pay off my loan early?

Typically, fees like the establishment fee are not refundable. However, it depends on the lender's policy and the terms of your contract.

How do fees impact the total cost of a car loan over time?

Fees can significantly increase the total cost of your loan, especially when they're added to your loan balance and accrue interest over time. For instance, a $10 monthly administration fee over a 5-year loan can add hundreds of dollars to your total repayment amount. Always use loan calculators LINK to factor in these fees and understand the full cost of the loan.

Can fees change during the loan term?

No - the fees are fixed as per the contract terms (in most cases). However, checking if the contract allows the lender to change fees under certain circumstances is important.

What's the difference between a fixed fee and a percentage-based fee?

A fixed fee is a set amount charged, regardless of the loan amount (like a $500 establishment fee). A percentage-based fee varies depending on the loan amount (like 1% of the loan value).

Is there a cap on how much lenders can charge in fees?

No - New Zealand is unregulated with regards to 'maximum fees', and the lender decides the fees they put in their car loan contracts. However, lenders also need to be competitive to attract new borrowers.

What can I do if I want to complain about the fees and charges in my car loan contract?

If you believe a fee is unjustified or wasn't disclosed properly, raise the issue with your lender. Our dedicated guide to complaining about car loans LINK is more details.

I'm in financial hardship - can I change the fees I've agreed to pay in my contract?

If you face financial hardship and need to modify your loan, our comprehensive guide on hardship applications LINK has more details about what can and can't be changed.

If you cannot pay a late payment fee immediately, it might be added to your loan balance, increasing the total amount you owe. Contact your lender to discuss options, as continuous non-payment can lead to additional charges and impact your credit history as lenders report your payments to credit agencies.