Buying a car is exciting, but choosing the right financing can be stressful. With so many options, how do you pick a car loan that fits your budget and needs? Don’t worry, we’ll walk you through what to consider when financing your next vehicle purchase.
Choosing a Car Loan That’s Right For You
Know Your Budget
First, determine the monthly payment you can afford without straining your finances. Experts recommend keeping car payments under 20% of your take-home income. Also factor in other ownership costs like fuel, registration, insurance and servicing.
Get pre-approved for a loan. This shows the maximum amount you can borrow based on your income, existing debts and credit score. It gives you negotiating power when you walk into the dealership.
Explore Different Loan Types
The type of car loan you choose impacts affordability and financial risk. Here are popular options to consider:
1. Fixed Rate Loan
This has an interest rate locked in for the full term of the loan. Your monthly repayments are the same. This consistency allows you to budget the exact car payment amount every month.
2. Variable Rate Loan
Here the interest rate fluctuates based on market rates. Your monthly repayment goes up or down accordingly. This loan usually starts with lower rates but carries risk of rising interest costs over the loan term.
3. Balloon Loan
This loan splits the amount owed into smaller regular payments and one large final “balloon” payment. It lowers initial monthly costs but you take on risk of affordability when the final payment is due.
4. Secured Car Loan
The car acts as collateral for the loan, so interest rates are lower. However, the lender can repossess your car if you default on payments.
New or Used – What Should You Finance?
New cars depreciate quickly, losing up to 30% value in the first 12 months. But used cars carry no warranty and may have hidden history issues. Weigh the pros and cons before deciding to finance new or used.
Leasing a new car is an alternative that keeps monthly payments low. But leasing contracts are complex with restrictions on mileage and condition. At lease-end you have nothing to show for years of payments made.
Watch Out for Hidden Fees and Fine Print
Don’t just look at the interest rate when comparing loan offers. Check for hidden fees like administration fees or early repayment penalties that can add hundreds to your total repayment amount.
Read all fine print on insurance waivers, conditions of loan approval, and financial penalties for late payment or defaulting on the loan. Ask for clarification from your lender on anything unclear before signing.
Compare Car Loans
Shop around with banks, credit unions and online lenders to find the most competitive car loan rates and features. Get quotes on exactly the same loan amount, tenure and details to properly compare offers.
Consider options to lower your interest rate like making a larger down payment or adding a co-signer with good credit. Every percentage point drop in interest rate can potentially save thousands over the loan term.
Check Repayment Terms
Repayment terms affect affordability. Longer 6-7 year loans have lower monthly costs but you pay significantly more interest over time. Aim for the shortest term possible that aligns with your budget.
Also consider whether you want to make repayments weekly, fortnightly or monthly. Weekly or fortnightly repayments reduce interest paid over the loan duration.
Read All Documents Before Signing
Carefully go through the car purchase contract, loan agreement, insurance paperwork before signing. Ensure you understand every document with no grey areas – don’t hesitate to ask questions.
Review loan terms regarding trade-ins, guarantors, loan termination, and penalties for defaulting before committing your signature. Only sign once satisfied.
Protect Your Investment
Insure your financed car comprehensively so you’re covered in case of theft, damage or total loss. Gap insurance helps by paying out any shortfall between your car value and remaining loan amount.
Also consider an extended warranty, windscreen damage waiver and other protections based on your risk appetite. The last thing you want is continuing loan repayments on a written-off or useless car.