New car on the horizon? 5 quick tips to choosing the right car loan
Whether you’ve decided to treat yourself to an upgrade or just need help getting from A to B, buying a new car can be an exciting time for anyone. But before you get caught up in the moment of soaring down the highway in your new set of wheels, you’ll first need to cough up the big bucks.
With budgets getting tighter and living expenses rising, taking out a car loan can help get your dream car across the line. So if it’s your first time borrowing money, here are five quick tips to help you choose the right auto loan…
Tip #1 – Know your borrowing power
Before starting your search, it’s important to establish how much you can afford to borrow by revisiting your monthly budget. Having an overview of your finances like this will keep you from biting off more than you can chew when it’s time to head into the dealership.
You’ll need to consider things like your essential living expenses, such as groceries and bills, making sure you can still regularly contribute to your savings and having enough money leftover for ‘fun’ spending.
The goal is to find the balance between borrowing a reasonable amount, giving yourself enough time to pay the loan off and knowing your budget can keep up with your monthly repayments.
Tip #2 – Shop around for the best deal
From dealer finance to credit unions to national banks, car loans come in all shapes and sizes. The trick finding the option that’s right for you is to do your research and shop around. While it might be convenient to opt for dealer finance or head to the big banks, they might not be able to give you the most competitive offer.
Credit unions and smaller lenders have rose to popularity over the last few years, as they generally offer lower rates and minimal fees. Just keep in mind that if you are looking to take out an auto loan with a credit union, you may need to become a member first.
Tip #3 – Pick a rate, but not any rate
Having a low interest rate is ideal but it’s only one half of the equation. Once you start shopping around on car loans, you’ll soon realise there are two types of interest rates: fixed and variable. Put simply, there is no ‘best’ type of rate, so it’s up to you decide which is the better option to help close the deal.
A fixed interest rate allows you ‘lock in’ your rate over the loan term so that your repayments remain the same, which can be handy if you like to keep to a budget. However, fixed rates can be limited in terms of flexibility, plus you may be charged a fee if you decide to pay out your learn early.
On the other hand, a variable interest rate fluctuates in accordance to the market and can either rise or fall. This means that if rates started to decline, the amount of interest you pay would also drop. But if rates suddenly spiked, you would have to ensure your budget could cope with a slight payment increase.
Tip #4 – Keep an eye out for extras
Many car loans offer some handy features that can help you clear your debt faster. Watch out for things, like extra repayments, which allow you to make additional repayments to your loan (potentially for free) and cut down on interest. A redraw facility gives you permission to redraw these repayments if you ever need them back for an emergency.
It’s also important to choose a loan with minimal fees, as these can add up over time. For example, a $5 monthly service fee might seem minor, over a five year term, that totals to a whopping $300!
While fees are a common feature to any financial product, it is still possible to find a budget-friendly option, you just need to do your research.
Tip #5 – Get your credit in shape
Once you’ve found a car loan that ticks all the boxes, make sure you’re in top financial shape by checking your credit history. Think of your credit history as an insight into your reliability when it comes to money. It details things like whether you’ve paid bills on time and how you’ve managed debt in the past.
Lenders generally reserve their best interest rates for credible borrowers, so if you come to find that your credit history could use some work, it might be worth repairing the damage before applying. This could be staying on top of bills, closing old credit accounts or paying off other debt. Doing this will also minimise your risk of being rejected and further crippling your credit score.
About the author
Ceyda Erem is a personal finance writer at Australian financial comparison site, mozo.com.au. She’s passionate about helping people live the life they want, without breaking the bank. When she’s not staying on top of the latest banking news, Ceyda’s catching up on true crime podcasts.