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Most vehicles – unless they’re classic cars – quickly go down in value, not up. So borrowing to buy a car can have a serious impact on our finances. Take time to think through all the options for a car loan when financing that set of wheels!

Checking all the options

To find a car loan that won't cost a bomb, compare all the finance options before stepping into a car yard.

Bank loans

Banks and credit unions offer pre-approved loans that let you know in advance how much you can borrow.

If you already have a loan, it might be possible to change it to include finance for a car.

Extending a mortgage

Homeowners may be able to extend their mortgage or use a ‘revolving credit’ loan. This is a way to borrow for a car at the mortgage interest rate, which is probably lower than other loan rates.

But if we add the cost of a car to a mortgage and don’t pay it off for many years, it will end up costing a lot more in interest overall than compared to paying off a car loan in one or two years.

So when going down this route, it’s smart to increase those mortgage repayments to clear the car debt as fast as possible. We don’t want to end up still paying for an old car while trying to pay off a new one!

Finance company loans

Car dealers often offer car loans that are actually provided by a finance company. The dealer will often sign us up for a car loan as part of the purchase process.

Finding the best interest rate

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

If we have an existing relationship with a lender, it’s often easier to access cheaper loans. For example, a credit union might offer car loans with better terms to its current members.

Checking the fees and charges

There are always fees and charges involved when getting a car loan. The documents the lender provides should show these clearly.

Expect to pay a loan establishment fee. Some lenders may encourage optional insurances or warranties. These will all add to the total amount borrowed.

  • It helps to always ask the lender to communicate all the fees and charges over the full repayment period. They should disclose a single, total dollar amount of what the loan will cost.
  • Compare the charges and fees with the price of the car. It may be that the charges amount to more than the interest you would pay on a different sort of loan.
  • There can be break fees (penalties for paying off the loan early) and fees for defaulting (missing payments).

Loan repayment insurance

Some lenders offer loan repayment insurance. This generally means that if the borrower dies, the insurer pays the lender the full amount owing. These policies also cover loss of income, such as through accident, illness or redundancy, so repayments are made 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, someone not in paid work won’t need cover for redundancy.

The Consumer Protection website has information to help you decide whether to get insurance when buying on credit.

Disclosure statements

By law, lenders must provide a ‘disclosure statement’ outlining:

  • All the fees and charges
  • What will happen if you can't make payments
  • What interest rate will be charged
  • How interest is calculated

It’s important to ask for a copy of the disclosure statement and read it carefully before signing up for a loan. The Consumer website has more about borrowers’ rights.

Top tips for managing car loans

  1. It helps to ask, ‘How much do I really want to spend on a car?’ before going shopping. And don’t forget annual running costs, insurance and maintenance, either.

  2. Check out the deals offered by as many lenders as possible, including banks and credit unions. You’re looking for the best interest rate and lowest fees.
    By law a lender can only charge reasonable fees, and they must also give out a disclosure statement detailing all the terms of the loan. This should happen before signing, or within five working days of signing. Ask for a copy of this statement and read it carefully before agreeing to any deal. If the statement is difficult to understand, ask questions, and a budget adviser can help you get answers.

  3. Work out the total interest on the car loan - use the Sorted loan calculator to do this.

  4. Take time to decide. A rushed decision can be costly when borrowing money.

Taking on several hire purchase or finance deals at once makes it more difficult to keep track. Many of us overestimate how much debt we can carry.



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