If you’re planning on buying a car, chances are you’re looking at your options for financing your car purchase. It’s one of the more expensive purchases in life, and with the high price tag comes a higher risk of losing money if you rush into things.
To begin with, cars can hardly be regarded as an investment. When you factor in running costs, depreciation, rego, insurance, etc. you can see that they really are a drain on your finances. A poorly-researched payment option can just be another thing that adds to the ongoing costs of your car. That said, for many of us a car is a necessity for getting to work and getting around, so it’s a case of minimising the damage it does to our wallet.
Let’s take a look at the main finance options available when buying a car and the things you should be aware of to avoid paying over the odds (for your finance, that is, not the car – that part is up to you).
Financing your car purchase with a loan
As with personal loans, it can be worth looking beyond the main lenders to get a good deal when financing your car purchase. Some credit unions will even help with the process of buying a car, which you might appreciate if you feel a bit out of your depth doing it for the first time.
If you’re buying a new car, you’ll be able to use the vehicle as security for the debt, which helps to keep the rate down but does mean the lender can take possession of the car if you don’t keep up with your loan repayments. For second-hand purchases they may not accept the vehicle as security because it’s harder to sell on if it gets repossessed. If that’s the case, you’ll need an unsecured personal loan.
Lenders will often offer discounted rates on cars with eco-friendly features and a high ANCAP (Australasian New Car Assessment Program) safety rating. You can check safety scores at ancap.com.au or visit greenvehicleguide.com.au for greenhouse ratings. If you find a good deal on a car with both of these scores, it could be a wise choice since you’ll be saving money on your finance as well as running costs.
After shopping around for a loan and finding one that you’re happy with, see if you can apply for pre-approval from the lender (not all offer this option). There are two benefits to having pre-approval before you hit the dealership: firstly, it’ll put you in a stronger bargaining position, and secondly, it should reduce the temptation of expensive dealer finance.
What to watch for with dealer finance
Dealers want to make it as easy as possible for you to walk into the showroom empty-handed and leave a few hours later jangling your new keys. That’s why they make their financing options so seductive and convenient, providing an on-the-spot decision before common sense gets the better of you.
That’s not to say they’re all bad – there are some competitive deals to be had out there – but you have to choose your dealer and time your purchase perfectly if you’re going to come out on top.
After choosing your vehicle at the dealership, they’ll take you through a credit application. This is assessed either by a separate financing division or by a third party finance company, and you’ll receive a decision almost immediately.
To calculate your interest rate, the dealer will look at a number of factors such as your credit record (any problems in the past might push your rate up) and how old the vehicle is (you’ll usually get a better rate on a new car). You might also be able to secure a better deal if the car will be used for business and you can provide an ABN (Australian Business Number).
When presenting you with a loan offer, the dealer is unlikely to focus on the rate, term and overall cost of the product and will instead hit you with lines like “You only need to pay back $85 a week!”
You, of course, will not fall for this tactic. As a consumer, you need to know what the fees are for the loan, what interest rate you’ll be charged, and what the loan term is (how long you’ll be paying it back for). $85 per week might represent quite a good deal for the car you’re buying if it’s spread over a three year term, but if it turns out to be five years, it’s a different matter.
Once you have this information you can compare it to the personal loans you’ve researched and see how it stacks up.
If the dealer seems at all reluctant to provide you with the details you’re requesting, say goodbye to him and the car and find another one – this is a sure sign that he’s trying to rip you off with high rates or fees, or both.
Be wary of any extras you’re offered at this stage, too. Tinted windows and an extended warranty might only add a couple of dollars a week to your loan repayments, but look at how much they’re costing over the full term of the loan – probably a lot more than you’re really prepared to pay. If there is something you really want to add, consider paying for it in cash so it won’t be subject to any interest.
Found this article useful? Here are 8 more tips for getting the best deal when financing your car purchase.
- The two main options for financing your car purchase are a personal loan and dealer finance
- A personal loan may offer better rates and lets you do your research beforehand
- Brand new cars attract a lower rate, and so may energy-efficient ones
- Get pre-approval from your lender if possible
- Some finance deals can be competitive but make sure you’re clear on the rate, fees and loan term
- If you want any optional extras, try to pay in cash rather than adding them to your finance deal otherwise you’ll be paying tons of interest on them