Home > Sorted Sections > Managing Debt > Car loans

Car loans

There is a lot to think about when you buy a car - fuel efficiency, safety, reliability and, of course, the cost. Buying a car can be a big expense. And unlike those other expensive things - a house or tertiary training - a car is an asset that generally goes down in value, not up.

How much you spend on a car and how much you choose to borrow to pay for that car are decisions that may have a big impact on your future net worth.

So before you sign on the dotted line, make sure you:

Know your options

To find a car loan that doesn't cost the earth, look at all your finance options before you go near the car yard.

There are many different types of finance deals available.

Banks and credit unions offer pre-approved loans which let you know in advance what you can spend. You may also be able to adapt a loan you already have to include finance for your car.

If you're a homeowner, you may be able to extend your mortgage or tap into your revolving credit loan. This means you can borrow for the car at the mortgage interest rate, which is typically less than other loan rates. Check out types of mortgages for more information.

Remember, though, that you want to pay off your car loan as quickly as possible so tagging it onto your 25 year mortgage may mean you will pay a lot more in interest than if you paid it off in one or two years. So if you do extend your mortgage, it's a good idea to make additional repayments to get the car-related debt paid off faster. Use our get out of debt calculator to see the full cost of adding your car to your mortgage.

Finance companies offer a wide range of loans including hire purchase and credit sale agreements sold through dealers. You may be able to apply for loans directly with the finance company. Otherwise you will sign up through the car dealer who will typically receive part or all of the loan establishment fee. Dealers also typically receive a commission on the warranties and insurances they provide. 

Find the best interest rate

Interest rates on car loans can vary widely so it's best to shop around.

You can expect a lower interest rate if you agree to a loan secured by your car. This means the lender can sell your car to recover the money owing if you don't meet your repayments.

You may find it easier to get access to cheaper loans if you have an existing relationship with the lender. For example, unless you are a member of a credit union you may not be able to get access to their loans. 

Check the fees and charges

There are always fees and charges to pay when you organise a loan and the documents you are given should show these clearly. You can expect to pay a loan establishment fee and some lenders may encourage you to take out optional insurances or warranties, which you will also have to pay for.

Some lenders offer loan repayment insurance with their loans. This insurance means that if you fail to repay the loan the lender will be paid by the insurer. The insurance premium can be expensive and not always easy to see in the loan contract. If the premium is added to the loan you will be paying interest on the premium as well as the car loan itself.

By law, lenders must provide you with a disclosure statement outlining all the fees and charges, what will happen if you can't make payments, what interest rate you will be charged and how interest is calculated. While the establishment fee and other direct charges will be listed, it is unlikely information about the commission paid to the dealer or salesperson will be included. Make sure you ask for a copy of the disclosure statement and read it carefully before signing up for a loan. To find out more, check out your rights as a borrower. 

8 rules of car loans

  1. Work out how much you can afford to spend on a car before you go out shopping.
  2. Don't forget to include annual running costs, insurance and maintenance in your budget. Our budget calculator can help.
  3. Check out the deals offered by as many lenders as you can before hunting for a car. Look for a loan or finance deal that has a good interest rate and charges low fees. By law, lenders can only impose reasonable fees.
  4. If you already have business with a bank or credit union, see what they can offer.
  5. By law you must be given a disclosure statement detailing all the terms of the credit deal before you sign or within five working days of signing. Ask for a copy of this statement and read it carefully before you agree to any deal.
  6. Work out the total interest you will pay on your purchase with the car loan calculator.
  7. Avoid taking on several finance and hire purchase deals at once. It can be difficult to keep track of when each deal has to be paid off and it can be hard to find the money to service many debts running at the same time.
  8. Take your time to decide. When you're borrowing money a rushed decision can be costly.
Tags: