How does financing a car work?
If you’re in the market for a new car, there are a few things you need to know before you take your new wheels for a spin.
Ideally, we would all like to purchase a new vehicle outright, but for a lot of us, that’s simply not an option.
This is where financing comes in.
Let’s unpack everything you need to know about financing a car.
A car loan is essentially a type of loan designed specifically to purchase a car.
When it comes to financing a vehicle, you may have the option of borrowing money from a bank, a credit union or finance company.
Each loan will have different features and terms to consider which we’ve outlined for you below.
Interest rates
Like with a mortgage, you can have either a fixed interest rate where the rate remains the same throughout the life of the loan, or a variable interest rate where the interest varies in line with interest rate changes.
Typically, variable car loans don’t have early exit fees, however, it’s important to always read the small print on any loan documents before you proceed.
Secured or unsecured loans
Car loans are often secured. This means your car is held as ‘security’ against your loan.
If you don’t make your loan repayments on time, the lender may repossess your car and ultimately sell it.
Unsecured loans often have a higher interest rate attached as there is a greater risk for the bank if you don’t make repayments on time.
Your borrowing capacity may also be reduced with an unsecured loan.
Loan period
This refers to the length of time your loan is active. Longer loan terms mean your payments are reduced but you will accrue more interest over time.
Most car loan periods run between two and five years.
Repayments
Car loans are commonly paid off monthly, however, like mortgage repayments, you can opt to make fortnightly payments if your lender agrees.
Making more frequent payments will also help reduce your interest payments.
Extra fees and charges
Before financing a car, it’s important to look at the big picture and all of the associated expenses.
Low-interest rates can look impressive; however, these loans sometimes attract higher fees.
When comparing loans, we advise looking at the comparison rate as a benchmark instead of the interest rates alone.
It’s also worth considering early payout fees and refinancing fees as you never know when your position might change, and you don’t want to be caught off guard.
Your Inovayt Finance Broker can talk you through these costs to keep you informed throughout the process.
Additional features
The features of each car loan vary, so you may want to consider what features are important to you, so you’re able to consider these in your decision-making process. Some features to think about include:
Early payout option: What options/fees are associated with this?
Pre-approval: Having prior approval for the amount you can borrow will help you negotiate with car dealers.
Flexible payments: Can you make weekly, fortnightly or monthly repayments?
Balloon payments: A pre-agreed lump sum you pay your lender at the end of your car loan.
Extra repayments: Do you have the option to make extra repayments?
Redraw facility: Do you have the option to redraw on the loan?
Key considerations
While you may be able to secure a loan through a car dealer quickly with little to no planning, there is often a higher cost associated. Don’t be swayed by convenience over affordability.
How to start financing a car
To ensure you get the best loan for your needs, we recommend speaking with an Asset Finance Broker who can advise you on which options are best for your circumstances both now and into the future. They can also navigate the application process on your behalf.
To speed up the process, we recommend you come prepared with:
- 100 points of ID.
- Proof of income; 2-3 payslips and your employer’s contact information.
- Your tax return if you are self-employed.
- Information around assets and liabilities. For instance, details about other finances you may have or substantial assets you own which may be used as security.
- The make, model, rego and VIN number if you have a specific vehicle in mind.
When determining your borrowing capacity and loan eligibility the lender will consider your income, credit history, the kind of car you intend to buy (new or used, as well as cost), your history of savings and your assets and liabilities.
If you’re interested in chatting with one of our Car Loan Brokers, get in touch.
Other things you need to know before financing a car
Refinancing
You can refinance a car loan to another lender with different terms and reduced fees. However, you need to weigh up the potential costs you may incur when exiting one loan and establishment costs that may be applied to the new term.
On the upside, the new loan will cover the costs of the previous loan, allowing you to finalise that loan.
Can I sell a car I have finance on?
You can sell a car that is under finance but there are many challenges associated, particularly if the vehicle is secured. Commonly, someone would pay off the debt they have outstanding before selling the car.
Technically, it is up to the purchaser to check there is no outstanding finance on the car. You can run a check on the Personal Property Securities Register.
If you do purchase a car that’s secured under finance and have an accident there is a likely risk that you will not receive the claim benefits.
Additional costs
Don’t forget to consider additional costs associated with a vehicle like insurance, registration and running costs, including fuel and servicing.
You can obtain free, no-obligation car insurance quotes online almost immediately. If you are applying for a secured loan, your lender will require you to prove that you have comprehensive insurance before finalising the sale and this may also increase your insurance costs.
Hopefully, we’ve covered everything you need to know before financing a car & hitting the road! But if you have any questions or require help financing your next vehicle, get in touch with us here.
