Car loans

Financing your dream car

Apart from a home, a car is one of the single biggest purchases you are likely to make. Don't let the excitement of buying a car get in the way of making good financial decisions.

1. What can you afford?

2. Choosing a car loan

3. Get value for your money

4. Car insurance

What can you afford?

Before you start looking for a car, use budget planner to work out what you can afford and what you are willing to pay. Start by doing a budget.

Include all the costs of owning and running a car. This can include annual registration fees, insurance, roadside assistance, petrol, repairs, maintenance, and road tolls.

Once you know how much a car will cost, decide how much you want to spend. For example, if you decide you want to spend $15,000, then stick to it. The dealer may offer accessories for the car and insurance products. However, these can really add up, and leave you with a bigger debt.

If you can't pay for a car from savings, you will have to borrow money. The type of car you buy will determine how much you need and what your repayments will be.

Consider getting a good second-hand car. This can save you money and you'll have more cash for other things like insurance. Before you buy, do an ownership check using the Personal Property Securities Register (PPSR) to make sure the car won't be repossessed beacuse the owner still owes money on it.

Choosing a car loan

A car loan is a personal loan for the specific purpose of buying a new or used car.Check Personal loan Calculator

You borrow an amount of money that you have to repay within a certain period of time (called 'the term'). You will have to sign a credit contract that specifies the amount borrowed and how you will repay it.

The term can vary, but is usually between 12 months and 5 years. If you don't pay off the full amount of the loan by the end of the term, or if you can't afford to make equal payments over the life of the loan, the final payment must be made as a lump sum. While this makes repayments affordable, you may be left with a large amount of money to pay off or refinance when the term ends.

Fixed and variable rate loans

If you shop around you can choose between a fixed or variable rate loan. In a fixed rate loan, the interest rate is locked in for the term of the loan. This means that your repayments will be set, so you know exactly how much you have to repay each month.

But if you make extra payments from time to time and pay out the loan early, you may be charged an early termination fee. You will also have to pay account fees and charges.

Secured loan

With secured loans you offer an asset, such as the car you are buying, as security for the loan.

If you don't make repayments, the credit provider can repossess and sell your asset to get its money back. The age of your car will affect its resale value. If your car is sold for less than you owe, you will still have to pay the credit provider the difference.

Unsecured loan

Unsecured loans are typically taken out for used cars. You don't need to offer an asset as security however you may not be able to borrow as much.

Interest rates are also usually higher for unsecured loans because the credit provider is taking a bigger risk. If you don't repay the loan, the credit provider can take you to court to recover its money.

Get value for your money

Just as important as getting the best price on a car is getting the best credit deal. By shopping around for credit before you go shopping for a car, you can find a loan that suits your budget and circumstances.

Many credit providers will give you 'in principle approval' for a loan, so you know exactly how much you can borrow and won't be tempted to spend beyond your means.

Dealer finance

If you buy from a car yard, the dealer might offer to arrange finance for you. While dealer finance might seem convenient you may get a better deal by shopping around. Banks, building societies, credit unions and specialist lending and leasing companies all offer car loans, so check out what's on offer before you go for dealer finance.

Car leases

A car lease allows you to rent a car for an agreed period of time, but you don't have the right to buy the car. At the end of the period, the lease is terminated and the car is sold.

You could make an offer for the car, but you will usually need to come up with a large sum of money to buy it and the credit provider does not have to accept your offer. If you want to own the car, getting a lease is not the right option for you.

Financing the cost of insurance

If you decide to buy insurance or other car accessories through a dealer, the salesperson might suggest adding the cost of these products to your loan. Think twice about taking up this offer - you'll be paying interest that could really add to the cost you've been quoted.

Car insurance

You must take out compulsory third party (CTP) insurance before you are allowed to take your car on the road. If you borrow money and a lender takes security over the loan they will usually require you to pay for comprehensive insurance. This insurance covers damage to your own car and other people's property if your car is in an accident (including fire), as well as covering you if the car is stolen.

Extra insurance offered by car dealers

If you are arranging finance for your car you may also be offered add on insurance products.

Think twice before you take up these offers - they may not be good value for money, or only pay in limited circumstances.

Loan protection insurance (or consumer credit insurance)

Loan protection insurance covers you if you can't work to repay your loan because of injury, sickness or involuntary unemployment. If you think you need life or disability cover you may be better off getting a policy that covers all your debts, or meets all your needs in providing for your dependents.

Gap cover (or shortfall insurance)

If your car is written off, your insurer will pay off your loan if there is a gap between what the car is worth and what you owe on the loan. Gap insurance can be expensive and you're less likely to need it if you have a small loan or pay a large deposit. You may be better off with a smaller loan, or spending your money on an agreed value comprehensive insurance policy (where you and your insurer agree on a fixed amount to insure your car if it is a total loss).

Extended warranty

Extended warranty covers the cost of unexpected mechanical repairs, parts and labour. See the voluntary and express warranties section of the Australian Competition & Consumer Commission website for more information.

Car insurance tips

Find out what the insurance covers - Don't buy add on insurance products if they are not right for you. Find out exactly what each insurance product you are offered covers, when it will pay out and what it costs so you can decide if it is worth spending your money on.

Work out the costs over a year - Ask what the full cost is before you decide to purchase any insurance. You might be told that the cost is 'only $30 a month' and that may sound cheap. But on a 3 year loan that's $1,080, and don't forget you will be paying interest on top of that.

Check the cooling off period - Take advantage of the cooling off period if your insurers provides one. For example, you may have 21 days to cancel the policy which can be handy if you change your mind.

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