A car is a significant purchase. For most of us, aside from our homes, a car is the most expensive thing that we will ever buy. Like a house, it’s something that few of us can afford to buy outright when we need to. Fortunately, there are car finance loans to help. But, when borrowing money, you should always be smart and do your research.
How do car loans work?
A car loan is a common type of personal loan to cover the full cost of a car if you don’t have enough in savings to buy the car outright. A car loan is a loan taken out for the purpose of buying a motor vehicle such as car, motorbike, 4WD, Van or other types of road vehicles. You borrow a set amount and then pay it back for a set term at a monthly cost, including interest, which may be at a fixed or variable rate. Car loans often last between 1 and 5 years.
Choosing the right car loan for you
Loans aren’t all the same. There’s fixed rate and variable rate, secured and unsecured, those that you can repay early and those that you can’t. They come with different interest rates, terms, and penalty payments, and you must take the time to find the best loan that you can get. Let’s take a look at what it all means:
- Fixed-rate means that you will pay the same rate of interest for the duration of the loan term.
- Flexible rate or variable rate means that the interest rates may change.
- Secured. When you take out a secured loan, you offer an asset for security on the loan. In the case of a car loan, this asset is the car that you are buying. If you miss a payment or two, you may have to give the vehicle to the credit provider in the event that you default on the loan. If they sell the car for less than you owe, you may still have to pay the extra to make up the difference of any outstanding amount owing.
- Unsecured. For an unsecured loan, you don’t have to offer assets as security. In the event you miss payments and or default, you may be charged penalties if you miss payments and your credit score may be negatively impacted.
- Early repayment or overpayment. Some loan providers accept early repayments in full or part, with no charge or extra interest. Some accept early or overpayments with a fee, and others don’t accept them at all.
Take the time to shop around for the right car finance
You could head to the dealership, fall in love with the fanciest car that they’ve got and walk out with a huge loan, with high-interest payments, for more than the car is even worth. It’s easy to accept the first financing option that you are offered, but this is usually a mistake.
Dealer finance is perhaps the most convenient option, but that doesn’t mean that it’s the best. Look at loans from banks, specialist lenders and car loans, building societies and credit unions, comparing not just the total amount of the loan, but the monthly repayments, interest rates, time frame, and the specific terms and conditions.
Beware of add-ons
Like any business, loan companies are keen to sell you add-ons. Only accept if you need them and check the contract for add-ons before signing. Things to look out for include:
- Loan protection insurance. This means that your loan is protected with insurance, in case you can’t pay in the event of illness, death, loss of job, and other changes in circumstances. While this can seem like a good idea, this kind of insurance may be in most situations poor value for money.
- Breakdown cover or extended warranty. This is another form of insurance to cover any unexpected repairs or mechanical issues. Ask yourself if this covers more than is already covered by any standard car insurance policy.
- Gap cover. This pays the “gap” between the market value and the remainder of your loan payout balance, should your car be written off or stolen before the loan is paid off.
Know your budget
If you are looking for a loan to buy a car, it’s a good idea to know what money you are working with before you go car buying. Spend some time budgeting, working out what you can afford in terms of both deposit and monthly repayments before you even start looking at cars.
Most loan companies will let you apply and give you an agreement in principle before you buy the car. This means that you know exactly how much to spend and how much it will cost you before you get to the dealership or private seller. Then, only look at cars that you can afford to buy.
Always keep up with your repayments
When borrowing money for buying a new or used car, it’s always crucial that you keep up with your repayments. Fail to do so, and you’ll face penalty charges. If it’s allowed by the provider, you should also try to pay extra when you can, to bring interest down or shorten the life of the loan.
If, for any reason, you cannot pay, contact your loan provider as soon as you can to talk about your options. If you are facing genuine financial difficulties, you have the right to apply fora hardship variation from the credit provider, but you must act fast.
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