The Dos and Don'ts of Car Loans
Updated: Feb 17, 2021
Getting a new car can be equal parts exciting and daunting. You may have bought yourself a car before, but are you sure you got yourself the best deal? Have a quick look at our Dos and Don'ts to make sure you don't make the same mistake twice.
Don't Get a 7 Year Loan
Most car loans are offered over a 7 year term. Likewise, most people look at the weekly payment amount, and not at the finer details of the contract.
Let's do a quick comparison of a $20k loan over 4 different terms.
So as you can see, with the same loan amount and interest rate you can save $1593 over the course of the loan just by paying it off in 5 years instead of 7! And the payments are only $21/week more.
Do Pay Weekly instead of monthly
Here is another tip to pay off your loan quicker - without lifting a finger! This one isn't as impactful as the above tip, but will still save you money. Have a look at the comparison below. All 3 are exactly the same loan - same amount, same term and same interest rate. The only difference is the frequency of instalments! If you get paid weekly it is definitely worth setting up your repayments to come out weekly instead of monthly.
This is how it works. If your repayments are $400/month, and you opt instead to pay $100/week, you will be making 4 extra repayments a year. That's because there are 12 months a year. 12 x 4 = 48 payments. Whereas paying weekly means you are putting 52 payments a year, which adds up to an extra $400. That means your loan will be shorter and you will save on interest! This trick also works if you get paid fortnightly, as you can see in the chart above (I love charts, can you tell?)
Don't Get Dealer Finance
Now, this is not always the case. Sometimes dealerships can offer great deals on finance. But, don't just take the loan that they hand you! Make sure you read the fine print, shop around, and choose the right loan for you. When I bought my first brand new car in 2015, I was able to get a better interest rate and a more flexible just by talking to my bank. I ended up saving myself thousands over the life of the loan.
The dealership may put pressure on you to sign the dotted line - just be strong and do what is best for you.
Do Shop Around For a Better Deal
Just a little bit of research can save you a whole lot of money. Your first stop should be your bank. They already have your details and can see your financial transactions. They may even give you a better rate as an existing customer. Then, compare rates with some of the other big banks and see how your bank stacks up against the others. You can also use a loan comparison site to have a look at other institutions that you may not have thought of.
Don't Apply for multiple loans at once
I really hope you read this entire article before you start applying for finance! It's fine to shop around, just make sure you aren't putting in multiple applications! Find the best loan and apply for that one only. Why, you ask? Because multiple enquiries on your credit file in a short amount of time can seriously affect your credit score.
Think like a bank. If you saw someone applying for 5 loans in a week you might think they were a bit dodgy or desperate for money and be less likely to give them a loan in the future.
Do Check your terms and conditions
I can't repeat this enough. Check. The. Fine. Print! don't just look at the weekly or monthly repayment figure. Check how much interest you are paying over the life of the loan. Ask if you are able to make extra repayments or pay the balance off early and if there is a penalty for doing so.
Don't Get a loan with a balloon payment
This is a common trap with car loans, in particular dealer finance. They lure you in with a low weekly payment, but what they don't tell you is that at the end of the loan you will have a residual payment, often in the thousands! If you follow the above advice and check your terms and conditions, this one won't slip by you. But it is such a sneaky tactic that it deserves its own heading!
Do check your fees
This is super important when comparing loans. One loan might have a lower interest rate than the other, but have a $10 monthly account keeping fee. That's where comparison rates come in handy! By law, financial institutions need to advertise their comparison rate next to their advertised rate. The comparison rate is adjusted to include extra fees. Look at the chart below.
You can see that although loan 3 has a higher interest rate, it is actually the best deal because it has lower fees. This all depends on how much you are borrowing of course. For a house loan, it might be worth paying the extra fees for a lower rate. But on a car loan of 5 years, forgetaboudit! Look for low or no fees.
Do Know Your Limits
And my final tip when buying a new car goes for any type of loan. Know your limits! If you can only just afford to make the payments, look for something cheaper or a better deal. Life has its ups and downs, and if there is 0 wiggle room in your budget for something to go wrong, you are going to cause yourself a whole lot of stress. And there is no stress like money stress!
I hope you have found these tips helpful. Feel free to have a look around while you are here. And good luck buying your new car!