Many people find car loans intimidating, because the stakes are high but their knowledge of the process is low.
It’s only natural to be confused if you’ve never taken out vehicle finance, or have done it so long ago that you’ve forgotten the rigmarole associated with car loans.
To simplify this confusing process, we’ve put together a four-step guide that explains how to get a car loan.
Crunch the numbers
Your first step should be to use a car loan calculator so you get a proper understanding of your borrowing capacity. By playing around with different interest rates, loan terms and repayment frequencies, you’ll get a rough idea of how much you can borrow.
Be prepared for bad news. The calculator might tell you that you’re not in a position to buy a car right now. Or the calculator might reveal that you need to buy a cheaper model, or perhaps switch from new to used.
Do things in the right order
Now that you have a better idea of your financial position, your next step should be to organise finance. That way you’ll know precisely how much you can borrow – and therefore how much you can spend – before you start shopping.
There are three reasons why it would be a mistake to buy a car first and then try to get a loan afterwards:
- Your lender might not give you as much money as you expected
- You might not have enough time to explore options
- You might be forced to choose the fastest loan rather than the best loan
Weigh up your options
One way to organise finance is to compare your options on a comparison site like RateCity and then directly contact your preferred lender.
Another way is to visit a finance broker, who will be able to organise a car loan for you with a range of lenders. The broker’s job is to understand your financial circumstances and then recommend the best car loan from his lending panel.
A third option – dealer finance – is best avoided. Although it’s more convenient to buy a car and sort out a loan through the one company, dealer-organised loans often turn out to be more expensive over the life of the loan. Consumers can also feel pressured to sign up for the loan then and there, instead of taking the time to weigh up their options.
Get your paperwork ready
Whichever option you choose, you’re going to need to provide documentation to prove you are who you say you are, you live where you say you live and that you’re able to repay the loan.
Requirements vary from lender to lender, but you’ll probably be asked to provide 100 points of identification. You should also expect to be asked for utility bills, payslips, bank statements, credit card statements and investment documents.
Some lenders won’t do business with consumers who don’t have comprehensive insurance, so you might also be asked for proof of insurance.