Finding the perfect new car can be hard. It has to be the right brand, have the right features and of course the right look.
While it pays to be picky when choosing your car, the same is true when it comes to car loans. Getting stuck in a car loan with high interest rates or fees can continue to have bad financial repercussions long after the excitement of owning a new car has worn off.
The best way to avoid an impulse car loan decision, that will leave you paying through the nose, is to do some research on the right loan for you. RateCity spoke to Michael Cullinan, Director of Rapid Finance, about the best questions to ask about a car loan before signing on the dotted line.
Is this a good interest rate?
Knowing what is considered a good interest rate in the market is essential to being able to compare the loans on offer against a bench mark. Currently the lowest loans are under five per cent but are only available to customers who are securing their loan against an asset. This asset is usually the car that is being purchased.
“Securing your loan is the best way to get access to the lowest interest rates,” says Cullinan, “and for added security you can fix your interest rate so that you can plan your repayments going forward.”
Deciding on a fixed or variable interest rate is also an important consideration. A fixed interest rate will remain the same over the loan term but a variable interest rate will fluctuate at the lenders discretion.
“Fixing can seem like a risk, as you might miss out on lower interest rates down the track, but if you prefer peace of mind in knowing your repayment amount over the term of the loan fixing is the best option.
“Although, if you don’t mind the potential risk of higher interest rates for a period of your loan, there is the possibility of saving money on interest over time with a variable loan,” says Cullinan.
What fees are involved?
Once you have found a loan with a competitive interest rate it is important to look at the fees that will be charged on a once off and ongoing basis. From establishment fees to account keeping fees and early termination fees, you might find that what initially seemed like a great deal will end up costing a fair bit more over time.
“Checking the comparison rate of a car loan is a great way to understand the overall costs associated with the loan,” advises Cullinan.
The comparison rate includes the interest rate and fees associated with a loan to provide customers with a more accurate representation of what they will be paying to the lender in total.
An important fee, that is often over looked by those taking out car loans, is the residual fee or ‘balloon payment’ charged at the end of the loan term. The residual fee is a lump sum payment, that you can opt to include as part of your loan, which keeps monthly repayments down but has to be paid at the end of the loan before the car is completely owned by the customer. Before signing up for a loan with a residual payment consider how you will pay the amount when the time comes and budget it into your savings plans.
Can I make the repayments?
The single most important question that customers should ask before taking out a car loan is whether or not they will be able to afford the repayments over the life of the loan.
“Calculating your monthly repayments and factoring them into your budget before you take out a loan is the key making sure you will have no issues down the track,” says Cullinan. You can use a car loans calculator to estimate your monthly repayments.
Keeping in mind that circumstances can change, and preparing a buffer, is just as important.
“If you find that you can comfortably make your expected car loan repayments now, consider what would happen if you were to have an unexpected expense one month,” says Cullinan, “If you don’t think you could afford the repayment in this situation you may have to save up a buffer before committing to a loan.”
In some cases, missing a repayment on your car loan can mean that interest rates are jacked up for the remaining term of the loan, costing you more in the long run. Doing some budget planning beforehand, with the help of a car loans calculator, will help prepare you for all the possibilities and prevent you from defaulting on the loan.