Choosing a car loan – tips and tricks

Dealer finance

If you're buying your vehicle from a car dealer, you may consider dealer finance to be a convenient and simple solution to the problem. Just be aware that this convenience can cost you.

Dealer finance can sometimes have a higher interest rate than the more competitive products from financial institutions. It can also come with extra terms and conditions, such as a fee for paying out the loan early.

There are many other options available to you so take the time to shop around before signing and committing to anything.

What to look for in a loan

The main thing to remember is not to rush your decision and shop for your loan before you start to look at cars.

Some of the variables you need to consider include:

  • Term of the loanpersonal or car loans often have a term of between one and five years, although some can run for up to seven years.
  • Interest rates – these can vary wildly depending on the term of the loan, financial institution offering the loan, loan amount and whether you want a variable or fixed rate.
  • Other fees and charges – check the fine print for establishment fees, annual fees, fees for paying out the loan early and fees for defaulting on a payment.
  • Insurance – does the loan require you to take out insurance to cover missed payments?
  • Repayments – can you make repayments weekly or fortnightly? This can quite often save money over the term of the loan

Finally, only commit yourself to a loan that you are confident you can repay.

Alternative finance options

For some people –such as unemployed people, or those with a bad credit history - getting a car loan is almost impossible.

However, there are some alternative finance options available, including:

  • Using the equity in your home – if you are currently paying off a mortgage you might also be able to borrow against the equity through a line of credit or home equity loan.
  • Revolving line of credit – similar to home equity loans except the funds can be redrawn once repaid without having to reapply. Generally there are no extra fees other than the interest payments per month.
  • Credit card – if you are extremely disciplined with your repayments, you could use a credit card to pay for a new car. However, most credit cards have significantly higher interest rates than loans and can add substantial amounts to the total amount paid.
  • Personal overdraft – generally have a higher interest rate than a car loan, but for a smaller amount this can be a flexible option. Also, personal overdrafts usually have an open-ended repayment period.
  • Short-term finance – sometimes referred to as pay-day loans, these are designed to tide a consumer over with a short term loan. These loans always have very high fees.

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