Automotive journalist John Cadogan from Badcreditcarloan.com.au discusses what record low interest rates mean for Australian businesses and consumers.

Unlike many other forms of finance, including credit cards and variable-rate home loans, car finance tends to be offered at a fixed rate. This means anyone with an existing car finance contract - especially a contract two to three years old - is probably paying a percentage that many would consider to be hefty in the context of current interest rates.

It could save you thousands if you review your car finance arrangements now, and lock in alternative finance at current rates.

With the Reserve Bank of Australia's adjustment of the cash rate to an historic low of 2.5 per cent in September last year, many people nearing the middle or end of their existing car finance contracts will find themselves paying a substantial premium.

If you organised your most recent car finance between November 2010 and November 2011, you unfortunately locked yourself in to interest at the going rate during something of a 12-month interest rate plateau. The cash rate during this period was 4.75 per cent - a premium of 2.25 per cent over today's RBA cash rate.

The cash rate had risen steeply in the lead-up to this plateau. It climbed from a post-GFC low of 3.0 per cent (during most of 2009), jumping during 2010 from 3.75 per cent in January, through 4.0 per cent (March), 4.25 per cent (April), 4.5 per cent (May) to 4.75 in November - a plateau where rates remained for basically 12 months. In other words, the cash rate jumped by more than 50 per cent between 2009 and 2010.

Anybody who arranged car finance during that 4.75 per cent plateau now has a contract (and a vehicle) between two and three years old, and will find themselves paying an interest rate premium two to three per cent (or more) higher than comparable finance available today.

With some pundits predicting a rate rise sometime in the next 12 months, now is the time to think carefully about your car finance needs. In many cases it should be possible to terminate a fairly expensive existing contract, purchase an equivalent new vehicle and drive away with substantially lower payments - while at the same time insulated from any rate rises over the term of the finance.

Obviously, you'll need to examine your own situation carefully - as well as evaluate the cost of termination for any existing finance arrangement you're locked into.

If your finance contract is older than two or three years, the potential savings could be even more profound. For anyone who arranged their finance five years ago, in October 2008, the cash rate was 6.0 per cent (it had just come back from 7.0 per cent at the start of the month). That's a staggering 3.5 per cent premium over today's rate. Conclusion? The five-year-old car you're driving today could be costing you more - a lot more - than a brand new equivalent model.

Shopping around for car finance and locking it in at today's historically low rates could be a great way to insulate yourself from the inevitable RBA rate rises over the term of ownership. Given that the newly elected Coalition government has reinstated salary sacrifice as a viable means of car ownership for ordinary Australian workers, you might even consider putting your pre-tax dollars to work, helping you pay for that new car.

A trusted independent financier will consider your personal situation and walk you through a range of car finance options, including novated leases, chattel mortgages and personal loans, and present you with a range of cost- and tax-effective ownership alternatives from reputable lenders.

Hedge against future rises if you're in the market for a new car.

John Cadogan - 9 May 2014