One of the things that might trip you up when getting a car loan is not understanding how much it is really costing you.
If you’re taking on debt to finance the purchase, it’s important to have a good idea of the likely value of your car if you have to sell it before paying off the loan.
Carsales.com editor-in-chief Mike Sinclair said you should think about the car you need rather than the car you want, and pay cash if possible.
“The best finance is not finance,” he said.
But if you are considering a car loan, you want to avoid the trap of owing more than the value of the car.
“Make sure you understand the true cost of the loan over its entire term,” Sinclair said.
“It doesn’t matter what car you buy – with a few very, very rare exceptions – by the time you drive it, it’s going to be worth less than what you paid for it, so you need to make sure you’re not overpaying. “
So what are the factors to consider before taking out an auto loan?
Sinclair said that getting your financing pre-approved before you start buying a car will give you more negotiating power and help you control your spending.
“You will know exactly how much you can spend and you will know what your reimbursements will be,” he said.
2. Interest rate
You can usually get a car loan from your bank for around 6-8%, which is much higher than the rate on a home loan, for example.
“A lot of people will put a car on their home loan, which is great if you’re disciplined enough to then pay off the car at an accelerated rate and not just let it sit on the home loan,” Sinclair said.
“What you can then end up doing is paying a very low interest rate, but for a very long time.”
3. Bank or concessionaire
When it comes to car dealerships, in most cases, they act as finance dealers and make a cut.
Sinclair said interest rates may be low on some dealer financing options because manufacturers partially fund the financing to sell the car.
“It’s not always the cheapest to go to a bank. But if you have a relationship with a financier, chances are you will get a better deal with them than just walking. [to a car dealer] and saying ‘I want this car, what financing options do you have?’ “, did he declare.
4. Lump sum payments
One way to keep your repayments low is to go for a lump sum payment, which is a lump sum you pay at the end of the loan term and can be worth up to half the purchase price.
This can help you reduce your repayments because you only pay interest on a portion of the principal.
But you have to remember that the value of your car will depreciate over time.
“There are some pitfalls for young players out there [with balloon payments]; you want to make sure the car is worth more than the ball on the other end, and that’s not a given, ”Sinclair said.
Most auto loans last for three to five years and it is wise to choose one that you will not be charged any penalty for if you pay it back sooner.
“[It also] gives you that flexibility if you have to get out of the car or if there’s a write-off and you have to pay off the loan, then you don’t pay those extra fees, ”Sinclair said.
It’s also a good idea to pay any fees associated with the loan with cash up front, so that you can keep your repayments as low as possible.