Choosing a car loan that's right for you
Are you ready for a new car but don’t how you’ll pay for it? Trying to get your head around car loans, credit ratings and more can be daunting. Well fear not. Here is a guide to help you through financing your new car. We've compiled a list of important things to consider when searching for the right car loan.
Know your budget
Make sure you know what you can and cannot afford before locking yourself into a loan so you avoid putting yourself under undue financial strain. Find out exactly what your car is going to cost. . Spend some time using an online loan calculator to get your head around what your repayments will be and don’t forget to budget for the annual costs of running the car – fuel, registration, servicing and incidentals.
Compare loans
There are plenty of institutions offering loans, and it can be difficult to work out where to go. Don’t just blindly accept a car dealership’s finance offer. Banks, car retailers and other financial institutions all have pros and cons (see Loan features to look out for below).
What is the difference between a fixed and variable loan?
A fixed interest rate is the rate you pay throughout your repayment period. It won’t change which makes it easy to budget. A variable rate is riskier. Instead of the rate being fixed, the interest rate can go up or down at any time.
How is that different from a secured or unsecured loan?
A secured loan is when your purchase acts as security against the loan. This means if you default on your payments, the lender has a right to seize your car. Unsecured loans will often only be issued under certain circumstances. Even then, they can come with a higher interest rate and uncompromising repayment period.
Always check the comparison rate
The comparison rate is the total rate of interest you'll end up paying. This includes the basic interest rate as well as any additional upfront or ongoing fees and charges. Comparison rates include the amount and term of the loan, the repayment frequency, the basic fee and the additional fees and finance charges associated with borrowing the loan.
How does credit history affect a loan application?
Before you can be approved for any loan, the lender will conduct a credit history check. Institutions need to be satisfied you can pay them back. If you have ever defaulted on a payment, or not paid a bill on time, this can negatively affect your credit rating. You could pay higher interest rates, or even have your loan application rejected, so always try to keep on top of your personal finances.
Each time you apply for a loan or any kind of finance, this information is recorded. If a financial institution sees you have made multiple applications in a short period of time, they may assume you are a default risk. Even if you've never had a loan or even a credit card before, your employment history and financial records are strong evidence of credit.
New or used car?
The kind of loan you choose may be determined by whether you buy a new or used car. Some loans are designed for purchases of one or the other, so it's important to clarify this early on. Our article Buying a new car versus a used car outlines some of the advantages of both to help you make that decision.
Loan features to look out for
All lenders have different pros and cons. The trick is to find a loan with the best features for you. To do this, consider the following:
- Can you make extra payments on your loan without penalty?
- Can you pay out your loan early without penalty?
- What are the interest rates?
- Can you choose your repayment period?
- Are there any additional hidden fees?
- How long does it take to be approved?
Remember, all financial institutions have their own take on these features.
Prepare your documentation
Make sure you have all the correct documentation before you go to sign your loan contract. The process will be much quicker the more prepared you are. Find out what documentation is required, such as credit history information, identification and proof of income, as these can often take time to organise and source.
