A car loan is a form of personal loan for a new or used car. You have to repay the loan and interest over a fixed term which is usually between one and ten years.
Just as you’d shop around and do your research before purchasing a car, you should also do your homework before choosing a car loan. It can save you thousands and enable you to pay off your loan faster.
It’s especially important to look at loans before you go to a car dealership. That way you’ll be prepared to negotiate knowing exactly how much you can spend, the best interest rate you can get and how much your repayments will be.
Fixed or variable rate
A fixed interest rate means you’ll know precisely how much your loan repayments will be each month. With a variable interest rate car loan your loan repayments can change if interest rates change. If interest rates go up your repayments will be higher. If interest rates fall your repayments will decrease.
Some car loans, usually those with a fixed interest rate, can have an early exit fee or lack the flexibility for you to make extra repayments. It’s important to ask these questions of the loan provider before entering into a car loan agreement.
Secured or unsecured
Most car loans are secured. Your car will be the security for the loan. The lender can repossess your car if you don’t pay the loan back on time. If the lender gets less for the car when they sell it, you’ll still be up for any shortfall.
With an unsecured loan you won’t have to use your car as security but the interest rate will usually be higher and you typically won’t be able to borrow as much.
Balloon Payments
A “balloon payment” is a final lump sum payment at the end of the car loan.
It has the effect of making your monthly payments smaller but you’ll have to repay the lump sum with interest so the total cost of the loan will be higher.
You’ll need to be able repay the lump sum when it falls due otherwise you could end up needing sell the car or take out another loan to pay it.
What to compare
These features are important to compare when choosing a car loan:
- Comparison rate – a figure for the cost of the loan that includes the interest and all fees.
- Interest rate – the rate of interest you’ll pay on the amount borrowed
- Application fee – the fee when you apply for a loan
- Other fees such as monthly service fees, missed payment fees and any others disclosed in the loan terms and conditions
- Extra repayments – can you make extra payments without paying a fee
- Loan term – longer length loans usually man lower repayments but you’ll pay more interest
- Loan conditions – are there limits as to the age of the car for instance
So overall there are quite a few decisions to make when taking out a car loan.
Make sure you consider your options and don’t get talked into taking out a loan that’s not suitable for you.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
