Car Loans: What You Need to Know

If you’re planning on buying a car on finance there a number of things you need to consider that will help you avoid some common traps.

How to finance your car purchase

If you need to take out a car loan to finance your purchase you have two options a secured car loan or an unsecured car loan. As the name would suggest, a secured loan would require a corresponding security on your part, which is often the car that you have purchased or another asset. In this kind of set up, the lender will have the right to repossess your car, or other asset you put for security, and sell it if you default on your loan repayments. You will often encounter secured loans when you purchase a new car.

An unsecured car loan doesn’t require any security over the car. However, you should expect to pay higher interest rates on your loan compared to a secured one because of the extra risk associated with the loan from the lender’s perspective.

If you’re planning on taking out a loan, you could approach several types of lenders for financing: the car dealer, banks, building societies, credit unions, and other organisations that offer this type of financing.

Prior to taking out the car loan, you will have the option to pay a fixed or variable interest rate. The advantage of having a fixed rate loan is that the interest will remain constant throughout the lifetime of the loan even if prevailing rates increase. The disadvantage, however, is that it is not that flexible in that the lender would likely charge you if you choose to repay the loan in full early, or make extra repayments. The fixed rate is usually higher than the variable rate as well. So if you’re looking for flexibility, a variable rate loan might be better for you. With a variable rate there is some risk that the rate will increase over time, but conversely it might also decrease as well.

A typical car loan has a term of anywhere between 1 and 5 years. If you want to pay off the loan sooner, choose a shorter term, however, the monthly repayments will be higher. Meanwhile, if you want to have affordable monthly repayments, choose a longer term. The details of the loan, including the loan amount and the interest rate will be specified in the credit contract.

How to Pick a Loan that Suits You

If you’re purchasing a car through a dealer, you might be tempted to get in-house financing (financing by the dealer) right away because of convenience. However, it is important that you explore other options first to help ensure that you are getting the best deal based on your needs and budget. That said, don’t focus on the sticker price alone, since there may be a huge difference in the cost of monthly repayments depending on who finances the loan.

Ideally, it would help that you secure pre-approval from the lender first. This will tell you exactly how much you will be able to borrow, and consequently, spend. That way, you’ll be able to stick with your budget once you start shopping around for a car.

Most importantly, though, make sure that you can afford the monthly repayments. Do your sums first before even deciding on taking out a car loan and other associated costs. To do that, check your monthly budget and see if there is room for this type of loan. In addition, put a buffer amount just in case your circumstances change in the next five years.

Things to be Aware Of

Beware of taking out a lease instead of a loan. When you get a lease, the car would only be leased out to you for a certain period, after which the actual owner will have to sell it. You could purchase it later, but you’ll end up paying more in total.

Prior to signing the loan contract, also make sure that you are aware of the fees and charges that are included. Lenders might offer you add-ons to your loan, which on paper might look like they’re providing great value, but always read the fine print first. For example, having an extended warranty on your car is very attractive, but make sure that you read the specifics, especially those relating to exclusions and conditions, what you will be covered for, and how much it is worth. If you don’t wish to take out any additional options, tell your lender about it, and check that these are removed from the contract.

Taking Out Car Insurance

Purchasing a car is a huge investment on your part, probably next to the mortgage on your home. Thus, it makes sense to insure it. While you’ll be required to take out a comprehensive third party (CTP) insurance, you may choose to purchase third-party property insurance or full comprehensive insurance. These would help cover areas which the CTP can’t, such vehicles of other people or your own, as well as damage to other types of property.

Ready to Buy a Car?

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Published on April 4-th, 2014 in Car Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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