Another post that is a bit off topic, but we thought we would put it together anyway to help anyone chasing a few basic answers to car finance and how it works in Australia. With that being said however, if you have specific issues relating to car finance, the best thing you can do is consult a professional. We are not financial planners, and this article is not to be treated as financial advice.
Many people have been in a situation where they have considered finance to purchase a new or used car. The world of finance tends to be quite confusing (almost on purpose, some would say) with jargon terms and smoke and mirrors to mask what should be a relatively straight forward transaction: The bank gives you the money to buy a car and you pay back a certain amount each weak till the debt is paid off. Unfortunately it never seems to be that simple, however this article hopes to make the world of car finance in Australia a little easier to navigate.
Here we go:
Basically, a car loan is a personal loan for the purpose of buying a car. You agree to pay back the money within a specified term, usually 5 years or less. You will end up paying back the loan plus interest. Repayments are usually made either weekly, fortnightly or monthly.
The loan will either be taken from the bank (Car Loan) or from the car yard (Dealer Finance). There are pros and cons to each of these 2 finance types. It is best you handle this on a case by case basis and do your research by reading the contracts in full and asking questions.
For the interest, you will either pay a variable or fixed rate of interest. Variable means that the interest payments will change depending on the interest rates. Fixed means that you will pay the same interest rate regardless of what the variable interest rates are.
The pros for the variable rate are that the interest rate could drop during the duration of the loan, meaning you pay less. On the flipside, the rates could go up and you may end up paying more. For fixed, you know exactly how much you will have to pay each time. The downside is that the fixed rate usually starts out higher than the variable and you do not benefit from any reduction in the interest rate.
The loan will either be known as secured, or unsecured. In the case of a secured loan, the car you will be purchasing is frequently used as collateral to back the loan. This usually results in a lower interest rate. The downside of this is that if you fall behind on your repayments, the bank or car yard reserves the right to sell the item of security in order to recoup its losses. In the case of an unsecured loan the interest rate will be higher, however they will have to win a court case, in order to recoup their money via the sale of the car.
A few tips for financing a car purchase:
Get the finance sorted before the car. In conducting yourself in this order, it can prevent you from taking out finance that does not work for you because you rush into something so you don’t miss out on that car. A good tip is to go to the bank first and get your finance sorted. Get a deal that you are happy with and then go looking for a car. If you find a car you like and you are offered finance from a car yard, you have something to compare it with and you have a bargaining tool to negotiate with.
Make sure you read the fine print in the contracts. Some of them have clauses in there that can take you by surprise. Beware of things such as balloon payments and extra account keeping fees. Also watch out for add-ons and extras that you don’t need.
Sort out your credit score. Make sure you know your credit score and get it as high as possible before you go get finance sorted. This will get you the best rate possible and can save you a lot of money.
Know what you do and don’t need from a car loan. If you don’t need another credit card, don’t accept one. If you want a fixed rate, don’t accept a variable. Know what you do and do not need and ask for it. I know it sounds basic but knowing what you require in advance will prevent you from paying for stuff you don’t need and getting a loan on terms that you would have preferred to be different.
Work out how much you can afford to borrow and how much you can afford to repay. If in doubt, you should speak to a financial planner. Going in over your head for a car loan is not a smart idea.
Get everything in writing. All the terms and conditions, any changes, all statements. Get it all in writing so you know exactly where you stand.
If you have a complaint, let it be heard. If you feel you were overcharged, short changed or the conditions of the contract were violated, speak up. Let it be known.
Gathering the facts, being prepared and acting rationally rather than emotionally are some of the key ways in which to overcome a lot of the uncertainty that seems to hang over the car finance market. By being informed, you can put yourself in the drivers seat when it comes to financing a car purchase.