Debt is not ideal, though sometimes it’s unavoidable. When I was younger I had a string of problematic cars because they were all cheap and ended up costing me significantly more over time than if I had just got a loan and bought a decent used car. In the end, we got a car loan and finally got a decent car, not before spending thousands more than we needed to.
Generally, I don’t recommend going into debt for things that will depreciate in value. If your car dies or something else happens it can be unavoidable. If you do have to go into debt for a car here are my tips.
1.) Work out what you can afford
Try not to get tempted by all the shiny objects! A new car doesn’t mean you have to buy a totally brand new, top of the line car. Work out what you can afford to repay each fortnight and how long you can sustain that debt for. You don’t want to be in debt for a long time or to stretch yourself too thin. While you technically might be able to borrow $40,000 for a car, do you really want a $40,000 loan which can end up costing you over $50,000 on a 5 year loan with a 10% interest rate? I suspect not. Instead, be realistic, research cars in your price range and get a loan you will be able to repay in full.
2.) Compare the total cost, but don’t apply for a loan yet
The cost of the car is not the only expense when it comes to a car and car loan. Look at interest rates, monthly fees, loan set up fees, early termination fees and any other fine print that might have hidden fees and charges.
Compare the total costs of the loans you are considering but do not apply for any. The second you apply for a loan, even if only to find out what interest rate would be applicable to your situation, that application goes on your credit file. The more applications you have the lower your credit score will be which will cause the interest rate you are offered to go up. It’s a vicious cycle. Compare as best you can without applying and get a good idea of the total cost of the car loan.
3.) How long will you need the loan for?
Car loans are typically 3 to 5 years, a longer loan term generally means lower weekly or monthly payments, however, you will pay more in interest long term. For example, a $20,000 loan over 5 years at 10% interest and a $10 monthly fee will cost $26,096. The same loan over 10 years will cost $32,916.
On the surface, that’s almost $7,000 more. If you are in deep strife and struggling to be able to afford the car, the longer term might be more appealing so you have smaller payments upfront, but aim to pay it off faster and check the fine print to make sure you can. Don’t stretch yourself too much at the beginning just to secure a shorter term loan. Be realistic with the length of loan you opt for then aim to repay faster if possible
4.) Keep your credit score high
Check your credit history before applying for any loans and get any discrepancies removed. Knowing your credit history and credit score gives you a good idea of the sort of loans you should be eligible for. It also gives you an opportunity to work out if you need to do anything to increase your score or if there is anything on there that shouldn’t be.
The higher your score and the better your history, the lower interest rates you get and better loan options.
5.) Get the rest of your cash sorted
Are you going to have a deposit from savings? Do you have a current car you can trade in or sell to put towards this car purchase? It will save you money long term if you are able to pay some of the costs yourself and borrow less.
Before applying for a loan, do what you can to get some money together, even if it is only to have as an emergency buffer in the form of savings for yourself and not to be applied directly to the loan. Take the time to work out your budget properly, know what you can afford and stick to it. Get smart with your money and the whole loan process will be easier.
6.) Don’t just use your own bank because it’s easiest
Many people go with their current bank or credit union because it’s easy. If you already have an account there, half your work your is done. Doing this often guarantees you will pay more than you need to. Instead, as mentioned in tip number 2, compare. You could use someone like Stratton for car loans as they work with a panel of brokers to get you the best deal and are the largest vehicle finance broker in Australia. So instead of you going to every provider and comparing rates, fees and charges, Stratton does it all and presents you with the best options, saving you time and money.
7.) Knowledge is power, borrow wisely.
Know as much as you can about everything. For example, if a car is used for business purposes, you can claim depreciation and running costs on tax. If the car is used for the loan you can get a secured loan which has lower interest than an unsecured loan. Both of those bits of information can save you thousands on a loan.
On top of that, knowing which car depreciate faster than others, which cars cost less to run, are more reliable, economical, easier and cheaper to repair when problems arise and which cars are easy to resell are all important things to know when choosing a car and in turn your car loan.
8.) Have a plan of attack
If you know how much you are borrowing, what your interest rate will be, monthly fees and it is all budgeted into your current budget, take things a step further and work out how you can pack it back faster, plus what impact that will have on your finances when you do.
For example, say you decide to borrow $20,000 at 10% over 5 years with a $10 monthly fee. As mentioned earlier, the total coast would be $26,096. If you can reduce this to 3 years you will save a little over $2,500. On top of that, if you managed to clear your debt early and continued to save the payments you would have been making, in the next two years you could have over $11,000 saved to put towards your next car, thus reducing the amount borrowed or the possibly even the need for a future car.
Get the loan, get the car then get cracking on paying it off asap.
What tips for you have for car finance?