Before we begin, picture this scenario..
Jon and Sue decide it’s time to buy a second hand car, so they decide to go window shopping at a car yard to start getting an idea of what they like.
Before they know it, an eager car salesman is by their side. He asks if they have a specific budget.
They’ve not done a budget to work out how much they can really borrow, so Jon says “not really – maybe $8,000?”
The salesman reassures you not to worry, the car yard can also help sort out their finances plus they’ve have got a great interest rate promotion on at the moment!
Fast forward an hour later, and because Jon and Sue were shown such a “fantastic once-in-a-lifetime deal” their emotions take over.
They’re now looking at a car for $13,000 but have also been recommended to upgrade this great car offer with a special on window tinting and an extended warranty – now increasing how much they need to borrow up to $15,000.
There are a number of concerns we can identify in this scenario.
Here’s what not to do when looking to finance a car purchase.
A car salesman’s number one priority is to sell cars and earn commission. If you arrive unprepared and are unsure of your budget, their sales skills can be overwhelming and you may feel pressured into a deal before you’re ready.
Being able to purchase a bigger priced car may sound good today, but it’s not guaranteed to work in your favour in the future.
A more expensive car than you planned = a bigger loan than you planned.
A bigger loan = more years to pay it out. (Wouldn’t you prefer to finish your loan payments in 3 years rather than in 7?)
Because borrowing a larger amount takes longer to repay, this can affect other future financial goals you have, such as saving for a home. There’s also the worst case scenario that the loan repayments could become unmanageable due to other life events which could result in the car being repossessed.
With hundreds of car loan products available in Australia, every one has its own features, set up costs, interest rate and fees – so it’s very hard to easily compare one to another.
If you don’t deal directly with a lender (like us) but instead go through a car dealer or broker, a brokerage fee is an additional cost they will charge for their service.
So if you do need a car loan, do your own research first.
We suggest you compare the monthly repayment as a general rule. This will not only help you with your budget, it will also make it easier for you to compare and see how some lenders may be incorporating large fees to compensate for a low interest rate they are advertising to attract your business.
As with most things in life, there are pro’s and cons for each of these options.
Below is a chart to help with your decision making process.
When considering which car loan to choose, here’s three steps to help you navigate to the most suitable one for you.
If you do already know the type of car you want to buy, make sure to check the lender’s car guidelines.
Lenders can have very specific restrictions on the cars they can finance such as the amount of km’s on the car, the age of the car and whether it is an import.
They also may not allow, or may have strict rules around purchasing a car privately.
If you haven’t chosen your car, still find out what their restrictions are so you know in advance.
This includes criteria such as how long you’ve been employed, if you are on probation, how old you are and your bank statement conduct.
Another key policy to check is whether your credit score is high enough to be considered for a car loan.
If your current credit score is acceptable, find out if they have different pricing for different credit scores, because the interest rate and fees they may be advertising may actually not be applicable to you.
As mentioned earlier, car loans from different lenders can have very different fees and charges which can make them hard to compare.
We recommend you use our earlier tip of comparing the monthly repayments as a great starting point, but you should also obtain all of the fees and charges that are applicable to the loan you are eligible for.
Try and avoid any lenders that charge a fee if you repay your loan out early, as this is an unfair way of stopping you getting ahead with your loan repayments and so they can collect as much interest as possible.
We hope you’ve benefited from this information, and if you are in the market for a car loan we hope that you find our loans to be the most suitable for you!