If you are looking for an upgrade in life then you are either thinking of finally asking your boss for a raise or a promotion, buying your own house, or buying yourself a car. Now, we cannot give you tips on how to ask your boss for a raise or a promotion, and buying a house is not really our expertise. But, we CAN give you tips on how to choose the right car loan with the ideal car finance rates for when you decide to buy yourself a vehicle.
There are many dealerships, car finance companies and lenders available out there. This is both a blessing and a curse. The upside is that you have so many options, the downside is that some of them are traps. If it’s your first time buying a car, you may find yourself lost in the sea of options, and the worst part is that you wouldn’t know if you are being tricked into something that is not ideal for your situation.
Is Car Finance a Good Idea?
To be quite honest, you may not have much choice. Even celebrities with high-paying roles take out loans for their cars so, unless you can buy the car of your dreams with cash, you need to apply for car financing. Car financing, being a good idea, is just a matter of perspective. When you have other debts to think about or take care of, it is hard to see another monthly payment as a good idea. But for others, they see their loans as an opportunity for a tax deduction.
How Do Car Loans Work?
Before knowing how to choose the right car loan or car finance offer, you must understand how they work. Knowing how they work can equip you with the information to be able to make smart decisions about your loan. If you end up focusing on the wrong thing, you may end up getting stuck on the wrong detail. For example, focusing on the monthly payment instead of paying attention to the purchase price and total cost, including interest. Another mistake is focusing on their desire to want a certain car model or getting a specific vehicle feature, which can cause them to go beyond their comfortable budget.
To be fair, it is quite tempting to focus on the monthly payment when making a decision on how much to spend on a car. However, some dealers use this mentality to score a sale and most of the time, they don’t have your best interest at heart. Dealers may also offer you smaller monthly payments by extending the duration of the loan. Having a smaller repayment amount sounds really appealing, but this also means increasing the interest costs.
As a rule of thumb remember that the longer your loan term, the smaller your repayments but, the more your interest costs. Inversely, the shorter your loan term, the bigger your repayments, but the lower your interest costs.
If you do end up with an ideal car finance rate or agreement, you can get stuck with an upside-down loan. This happens when you owe more on the car than it is worth. You may be offered deals with small down payments, which is another tempting arrangement. But you have to consider that this means that you will be borrowing more money which puts you at risk of getting an upside-down loan.
Before you claim a car as “the one”, make sure that you can realistically afford it so that you can avoid taking on a loan that can hurt you financially.
About the Lenders
Some auto dealerships offer in-house car finance products, however, do not be pressured into agreeing with their offer right away. Keep in mind that the auto dealership is not the only place where you can get an auto loan. You can also get some financial help for your car from credit unions, banks, online lenders or peer-to-peer lending sources.
So, if you feel like your car dealer’s car loan offer is not really appealing to you, by all means, shop around and compare loans. You can do this by consulting with other lenders before you take your first step onto a car lot. Knowing what else is out there can give you an upper hand when bargaining with the dealership.
What are Prepayment Penalties?
One of the most effective ways of saving money on interest is paying off your car loan early. This is why it is important to check your contract for prepayment penalties. A prepayment penalty is a fee that you pay for paying your debt ahead of schedule. You want to make sure that your car finance contract allows you to be flexible with your payments. You should make sure that you can accelerate payments without penalties.
Choosing the Right Car Finance Product
Here are some tips on how to make the right decision when choosing a car loan:
1. Determine if your depreciation is a tax deduction
A car is a depreciating asset, so you should think carefully before you take out a loan for it. If you really need a car, make sure that you do not borrow more than you need. Since the value of your car will decrease as time passes by, you should not make a loan decision that will cripple you financially in the long-run.
You need to make sure that you do not sacrifice the quality of your life over a car. Make sure that you don’t end up owing money that is a whole lot more than your car itself. Just because you can borrow a big amount of money does not mean that you should. You should also check with an accountant if your depreciation is a tax deduction.
2. Consider after-factory modifications
You may be considering a car because of certain features. Maybe you want a specific car model because of its tinted windows or a custom paint job. If this is the case, you should perhaps skip looking at top model cars to get these features included as standard. Instead, you should look for a decent car and look for these extra features as after-factory modifications. You would be surprised as to how much cheaper they will be this way. A smaller car purchase amount means taking out a smaller loan, and a smaller loan means smaller repayments.
However, you should also consider that some after-factory extras are not always covered by your car insurance. You may want to include them specifically and pay a higher premium. Depending on your insurers, some may automatically cover modifications and accessories that are permanently attached to your car. Some insurers also cover a wide range of mods like alloy wheels automatically. But to be sure, you should check with your insurer first.
3. Shop around for reasonable car finance rates
Not all car loan offers are created equally. Interest rates vary from one lender to another. So it is best if you can compare car loan interest rates to make sure that you end up with a loan that is suitable for your needs.
4. Look for a good car insurance policy
Car loans will not cover your insurance premium, so you might as well look for a good car insurance policy on your own. Insurance is essential when choosing car financing because you will be dealing with these two for a long time. Since your car loan is already a debt, the last thing you want to have is more debt in case you get into a vehicle accident. You want to have an insurance policy that will work with your car loan repayments.
Car Finance Traps to Avoid
Here are some traps that some dealers may throw your way:
1. Balloon payment offers
Fortunately, not many dealers offer this arrangement anymore. However, it is still best that you educate yourself so you know a trap when you see one. A balloon payment is when you agree to offset an amount from the principal of your loan. Then, you would need to repay that at the end of the loan as the final repayment. This arrangement allows you to pay smaller interest and, therefore, lower repayments in the meantime.
However, it gets ugly at the end of your loan. The balloon payment can be a large lump sum in one hit. If you do end up with this kind of arrangement, make sure that any balloon payment is affordable for you.
2. Introductory car finance interest rate offers
Sometimes traps are beautifully packaged so that you don’t realise that they’re traps until you have no way out. In the car financing industry, these are introductory low interest rate offers. These appealing low car finance rates eventually revert to an extremely high-interest rate at some point during the term of your loan. Before signing a contract, you should understand how long the introductory rate will last and what the rate will be once it reverts.
3. Adding car loans to home loans
Some homeowners have the option of borrowing money to buy a car by dipping into their home loan. This can be done through a redraw facility or a separate line of credit secured against the house. If you are considering this to get a lower interest rate then this may be a good idea. However, there is a risk that you may never get around to paying it back.
Regular car loans typically have a set loan term of 2–7 years, while a home loan redraw or line of credit could accrue interest for decades. Needless to say, it will cost more in the long run.
Owning your own car is exciting, but you should pay attention to the financial products that you will be applying for in the process. You should be logical and practical when making a decision in this matter. After all, your car and your debt are both long-term commitments.