How to finance your car

By David Bonnici, 24 Oct 2016 Car Advice

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Unless you have the cash handy to purchase your new car you’ll need some kind of loan or lease arrangement, but which of the many car finance options is best for you?

There are several ways to get quick finance for your new ride such as bank loans, factory finance or car leasing.

Knowing which financing deals work best is as important as negotiating the final price of the car. It’s no use getting a good deal on a vehicle if your repayments end up costing hundreds more than they should.

CAR LOANS

This is where a bank or other financial institution gives you the money required to buy the car and you pay it back with interest over an agreed period, usually three to five years. The advantage of a car loan is you can get pre-approval so you’ll know how much you’ll have to bargain with.

There are different types of loans for buying cars, including:

Fixed rate: Where you lock in the interest rate for the term of the loan so you know exactly how much you’ll need to repay.

Variable rate: The interest rate will change with the market, which is good should they go down. This is more common with home loans taken out over much longer periods.

Secured: This is where the car you buy is used a surety, meaning the financer can repossess the car should you be unable to repay the loan. If the car is worth less than the sum owing, you will also be required to pay the difference. Secured car loans generally have lower interest rates than personal loans.

Unsecured loan: These are personal loans that don’t require the car to surety so they’re usually for used cars as you can’t borrow as much as with a secured loan. Because the bank is taking a bit more of a risk the interest rate is usually a little higher than with secured car loans.

Mortgage redraw:  If you owe less on your home loan than your house is worth, you could borrow against the balance, or equity, to buy a new car. The advantages of this are you just have one regular loan repayment at low home loan rate and it’s easier to set up than if organising a new loan. You can also stretch out the period of the home loan so your monthly payments remain the same. However, as well as increasing the size of debt, compound interest calculated over the longer period means it could actually cost more than a separate car loan, though this can be offset by making extra repayments. Be sure to factor in any additional costs such as redraw fees.

car loan documentation

DEALER OR FACTORY FINANCE

These are car loans arranged by the car dealers that are underwritten by the car manufacturers or third party financial institution. Sometimes these will have very-low or even no interest; however this will often be tied to you having to pay more for the car meaning you don’t necessarily save in the long term.

BEFORE YOU BORROW

Shopping around for the best loan is as important as shopping for the best car price. Most people look for the lowest interest rate, however it’s more important to focus on the full repayment figure, which influenced by other factors such as fees and repayment options – most car manufacturer and financial institution websites have loan calculators to help you compare.

Important things to consider:

  • Loan establishment and service fees and if there’s an early termination fee should you pay out the loan early.
  • See if there an option to pay fortnightly instead of monthly as this will help pay off the loan quicker.
  • Make sure you can afford your loan payments on top of other car running costs such as fuel, insurance, maintenance and registration fees.

LEASING

Another way to get a new car without having the money up front is to lease it, which is essentially a long term rental. When you lease a car you make regular payments which include the running costs of the car including maintenance and at the end of the lease period the car goes back to the lender. You can buy the car at the end of the lease period but the final balance, combined with all the payments you made would eclipse the car’s actual value when new.

Advantages of leasing is being able to make claims for taxation purposes should you use the vehicle for work. You can save on taxation by having the lease payments come out of your pre-tax pay (salary sacrificing) which means your taxable income is less.

Like a car loan, all costs are calculated in advance. 

There are three types of car leasing options:

Novated lease: This is the most common arrangement for salaried employees who want the tax benefits of salary sacrificing lease payments. By reducing your taxable income the money  that would have been taxed can be used on a better car. A novated lease is arranged between the employee, the employer and a financier and is generally simple to set up. It can include a full maintenance package to give you a better idea of overall running costs.

Finance lease: This is a common for vehicles used primarily for business. The vehicle belongs to the financier and is rented out to the borrower in monthly instalments. This generally involves a fixed monthly lease payment and a residual amount payable at the end of the term should you want to keep the car. As the borrower you can choose the actual vehicle from your choice of car dealership and negotiate the price with the dealer just like you would if you were taking out a car loan.

Operating lease: This is set up like a finance lease but the borrower does not take on the obligation to pay the residual value. The vehicle itself is merely handed back to the financier at the end of the term of the lease.