Working out how to pay for your car is a huge decision. There’s a dizzying array of financial institutions and loans to choose from and heaps of jargon to decipher.
Rhiannon Ernst gives you a guided tour of the world of loans.
An institution… isn’t that a prison?
There are a variety of places that offer money lending services for cars. They’re not all the same and there are advantages and disadvantages with each.
The most common are:
Car dealers: Most car dealerships offer finance. Even though it may seem convenient to do everything in one place and accept their deal, make sure you shop around first. If you can get finance approved before buying your car from a dealer, you can offer the dealer cash which may get you a better deal. Dealers can be less flexible than other lenders, but you do get a cooling off period (see ‘Dealing with the dealer’ below for more info).
Banks, credit unions & building societies: Financial institutions offer a whole range of options including car loans, personal loans and credit cards. Make sure you do your research because the variety of loans, terms and rates is amazing. Check out www.moneymanager.com.au or www.infochoice.com.au to compare the different types of loans and interest rates on offer.
Principal: The total amount of money you borrow.
Interest: The amount the lender charges you for borrowing their money.
Fixed interest rate: The interest rate remains the same for a set amount of time, giving you greater control over your finances. Normally this means that you can’t make more than the agreed repayments in your contract to get the loan down quickly.
Variable interest rate: The rate moves up and down with the market.
Split interest rate: Either a fixed interest rate applies for a set period of time, after which time the rate changes to a variable interest rate OR part of the principal has a fixed interest rate, and the rest has a variable interest rate.
Getting your loan
Personal loans are normally available for amounts between $3000 and $100,000 depending on the lender. They can be secured against an asset (like a car or house) or unsecured. Secured loans have a lower interest rate because the risk of default is lower, as the lender is able to repossess the asset if you stop making repayments.
A car loan is a kind of personal loan and the most common way to borrow money to buy a car. Car loans are normally only available for cars up to three years old. The loan period can extend from one to seven years depending on the lender.
A popular type of car loan is a ‘balloon loan’. Balloon loans allow you to pay reduced monthly instalments for the term of the loan, with a large ‘balloon’ payment at the end to clear the debt.
If the finance company has concerns about your ability to pay back the loan, they may ask you to get a guarantor who is then legally bound to pay back your loan if you can’t.
How much will my loan cost?
Personal loans have cheaper interest rates than credit cards, but they do have some additional costs.
Application and ongoing fees are commonly charged by lenders. Stamp duty, search and registration fees may also apply.
A fixed rate interest loan will make it easier for you to budget for repayments as they will be the same each time.
Variable rate loans will offer lower interest rates at the start but there is a risk that payments may increase or decrease over the life of the loan. Falling interest rates is a bonus to borrowers but rising interest rates may mean increased payments during the term of the loan. If you’re worried about interest rates rising, a fixed interest rate loan might be better for you.
Dealing with the dealer
It might be more convenient to get finance from the car dealer, but it may not be the best deal – banks, credit unions and other financial institutions usually will be cheaper and more flexible.
If you sign anything at the dealership, it will probably be a sale contract.
You may also sign a loan application or loan contract.
A contract is legally enforceable, so make sure you read it carefully before signing. Don’t sign unless you understand what you are signing and you’re certain that you’ll be buying the car. If in doubt, always seek further advice.
If a dealer asks for a holding deposit, make sure you get a receipt.
If you’ve decided to buy a car, but your loan hasn’t been approved, then make sure that the approval of the loan is written into your contract as a condition. This will get you out of trouble if you can’t get finance.
If you do arrange to get a loan through a dealer, you have a right to a one-day cooling off period. This applies when you purchase a car from a dealership and they:
- arrange your loan for the car, or
- supply application forms for (or a referral to) a credit provider.
The cooling off period begins when you sign the contract and ends at 5pm on the next business day for the dealer. You can negotiate an extension or waive the cooling off period, but it’s always a good idea to keep the cooling off period to safeguard your rights.
During the cooling off you can cancel the contract, for any reason, by giving a signed, written notice to the dealer. If you do cancel, you will have to give the dealer $250 or two per cent of the purchase price – whichever is less.
For lots of helpful info on buying a car, including advice on getting finance, visit the NSW Office of Fair Trading website www.fairtrading.nsw.gov.au. You can also download a copy of The Car Buyers Handbook there or at www.rta.nsw.gov.au (click on the publications).
Other costs to factor in
Buying a car is an expensive business.
If you’re thinking about taking the plunge, remember to budget for these extra costs – you may even want to think about factoring some of them into the amount you borrow.
- Registration – an annual cost that can be paid online at myRTA.com, by calling 13 22 13, or at your nearest Roads and Maritime Services (replacing Roads and Traffic Authority) motor registry. The price depends on how heavy your car is and how you use it (e.g. personal or business use).
- Stamp duty – a once-only cost paid when you register a car in your name. Stamp duty transfers car ownership to you.
- Compulsory third party (CTP) insurance – like the name suggests, you must have this. It’s a yearly cost that provides compensation for other people injured when you or the person driving the car causes a crash. Check out www.greenslips.nsw.gov.au to get the best deal.
- Third party property (TPP) insurance – this covers you for damages caused by your vehicle to other vehicles or property, but doesn’t cover your vehicle against any damage. Not compulsory, but a good idea to buy each year if you can afford it. If you borrow funds to buy your vehicle, TPP insurance may be a compulsory condition of providing the funds.
- Full Comprehensive insurance – includes TPP and the insured value of the vehicle.
It’s a good idea to get a few quotes before choosing the appropriate insurance cover.
All the (not so) small things
Here are some small costs you’ll need to factor into your weekly budget to keep your new car on the road:
- Petrol – keep a check on the price of petrol, you may be surprised at the size of your weekly fuel bill.
- Service and repairs – it’s recommended that you service your car every 10,000–15,000 kilometres or every six to 12 months. It’s a good idea to set aside a bank account for car costs so you don’t have to scramble for cash if you need urgent repairs. Even if an unexpected repair job doesn’t arise, and you only put $10 aside each week, you can then use the money to pay for next year’s registration.
- Car security – from steering locks to alarms and vehicle tracking systems. If you can afford to buy a car, then you should consider investing in some form of extra security.
The cheater’s guide to keeping it cheap
Car prices can vary from a few hundred dollars to thousands depending on the age of the car and where you buy it. Keep your eye out for end of financial year sales at car dealerships and private sales where the owner is going overseas or has to sell quickly – you may be able to negotiate a better price.
Purchasing from a car dealer
If you can, try and arrange your finance before going to the dealer. This way you can approach the dealer with a cash offer, giving you more negotiating power.
Ever thought your parents were embarrassing for saving up those little petrol coupons from the supermarket? You might think differently once you’ve got your own car. With petrol prices reaching well over $1 a litre, bring on the coupons!
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