You’ve found your dream ride and it’s love at first sight. Now all you need to do is take out a car loan and drive away into the sunset. Simple, right?
Well, not necessarily.
A Car Loan is a big financial commitment. With so many loan products on the market, it can also be tricky working out which one is right for you. Below, we’ll take a look at some of the most important things to consider when choosing a car loan.
Are you buying a new or used car? Do you need to borrow the full cost of the vehicle or a portion of it? Will your repayments impact your ability to afford day-to-day expenses? These are all important questions you’ll need to ask when determining the amount you need to borrow.
Make sure to stick to your budget. It might be tempting to borrow a bit more money if you’re approved for a higher limit, but this can end up backfiring. Cars are depreciating assets, dropping in value the moment they leave the showroom. The last thing you want is to borrow above your means and end up owing more than your car is worth.
This will depend on how quickly you can afford to repay your loan. The shorter the loan term, the higher your repayments will be. On the other hand, a longer loan term means you’ll pay more in interest over time.
If you’re lost when it comes to the math, a car loan repayment calculator help by doing the hard yards for you. Simply enter the amount you want to borrow, followed by the interest rate, loan term and repayment frequency. This will help you to determine how much you’ll pay overall. You can then adjust the loan term or interest rate accordingly.
Don’t forget to factor in application fees or monthly service fees if they apply, as this can make a special low rate not so special by comparison. It’s also important to check your credit score before lodging your loan application. A “good” or “high” credit score indicates to lenders that you are a responsible borrower, and you’re more likely to have your loan approved at a lower rate than someone who has a poor credit score. You can check your credit score for free online.
A secured loan means you’ll need to use the car you’re buying as collateral. In the event you can’t repay your loan, your bank or lender will repossess your vehicle to cover your costs. Secured loans therefore tend to offer lower interest rates and more flexible loan terms. If you take out an unsecured loan you won’t need to put up your vehicle as collateral, but you will receive a higher interest rate.
Regardless of your loan type, it’s important to meet your monthly repayments. Falling behind means you’ll either have your vehicle repossessed or be faced with a court case. You also risk damaging your credit file.
Each lender differs slightly, so it’s important to look beyond the interest rate when comparing loans. Other features you may want to consider include the following:
Taking out a loan is a big financial commitment, which may take years to repay. It’s therefore really important to shop around and do your research first so that you can make an informed decision, not an impulse one.
Written by Bessie Hassan
Bessie Hassan is the head of PR & Communications and a money expert at Finder. An accomplished public relations professional, journalist and editor, Bessie has written for a range of publications including the Sydney Morning Herald, The Australian, Marie Claire, Women’s Health, and more. Bessie has a passion for helping Australians find better financial solutions.