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Car loans

A car is a ‘value loser’ as it is something that generally goes down in value, not up. So if you borrow to buy a car it can have a big impact on your financial future.  Make sure you stop and take the time to think through all your options.

Top tips for managing car loans

  1. Work out how much you can afford to spend on a car before you go shopping.
  2. Don't forget to include annual running costs, insurance and maintenance in your budget. Our money planner can help.
  3. Check out the deals offered by as many lenders as you can. Look for the best interest rate and lowest fees. By law, lenders can only charge reasonable fees.
  4. If you already have business with a bank or credit union, see what they can offer.
  5. By law your lender must give you a disclosure statement detailing all the terms of the loan. This should happen 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. If you find the statement difficult to understand, take your time and get help from someone like a budget advisor who can make it clear what you’re committing to.
  6. Work out the total interest you will pay on your purchase with the debt calculator.
  7. Avoid taking on several hire purchase or finance deals at once. It can be hard to keep track.
  8. Take your time to decide. When you're borrowing money a rushed decision can be costly.

Know your options

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

Bank loans

Banks and credit unions offer pre-approved loans that let you know in advance how much you can borrow. You may also be able to change a loan you already have to include finance for your car.

Extending your mortgage

If you're a homeowner, you may be able to extend your mortgage or use a ‘revolving credit’ loan. This way you can borrow for the car at the mortgage interest rate, which is probably less than other loan rates. Find out more about different types of mortgages.

However by adding the car to your mortgage you could end up paying a lot more in interest overall than if you paid a car loan off in one or two years.

So if you do extend your mortgage, make sure you increase your repayments to clear the car debt as fast as you can.

At the very least you should aim to pay off the cost of the car within the time you would expect to own it – say within five years. You don’t want to end up still paying for your old car while you are trying to pay off a new one!

Use our mortgage repayment calculator to see the full cost of adding your car to your mortgage.

Finance company loans

Finance companies often provide the car loans offered by a car dealer.  You may be able to apply for a loan directly to a finance company, or the car dealer will sign you up as part of the purchase process.

Find the best interest rate

Interest rates on car loans can vary widely so shop around. You can expect a lower interest rate if you agree to a loan ‘secured’ by your car. This means if you don’t meet your repayments, the lender can sell your car to recover the money owing.

You may find it easier to access cheaper loans if you have an existing relationship with the lender. For example, you may only be able to apply for a loan from a credit union if you’re already a member.  

Check the fees and charges

There are always fees and charges when you get a loan. The documents the lender provides 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. These will all add to the amount you borrow.

  • Always ask the lender to tell you all the fees and charges over the full repayment period. They should give you a single, total dollar amount of what it will cost you.
  • Compare the charges and fees with the price of what you are buying. It may be that the charges amount to more than the interest you would pay on a different sort of loan.

Loan repayment insurance

Some lenders offer loan repayment insurance. This generally means that if you die the lender will be paid the full amount you owe by the insurer. And if you lose your income through no fault of your own (e.g. accident, illness, redundancy) your repayments will be covered for a period of time specified in the policy.

The repayment 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.  

It may also be an unnecessary cost. For example, if you are not in paid work you won’t need cover for redundancy.

The Ministry of Consumer Affairs website has information to help you decide whether you need insurance when you buy on credit.

Disclosure statements

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
  • How interest is calculated

Make sure you ask for a copy of the disclosure statement and read it carefully before signing up for a loan. Find out more about your rights as a borrower on the Consumer website.