What to think about when buying add-on car financial products

What to think about when buying add-on car financial products

Just when you’ve ended the hunt for your dream car, you might find yourself faced with another major decision: add-on financial products.

Whether you’re buying a new or second-hand car, car dealers will likely try selling you add-on financial products which cover car-related extras like tyre and rim damage, gap insurance, and extended warranties.

While caryards might try to convince you to commit to these add-ons, it’s important to remember these are optional. As in entirely. You don’t have to commit, even if it seems like a car dealer is forcing the issue. 

In fact, many of these extras may charge expensive premiums, end up being poor value for money, and potentially be restrictive with regards to payouts. Just because you’ve managed to find the best car loan, doesn’t mean that money should go to an extra you don’t potentially need. 

Dealers receive commissions of about 20 per cent of the premiums, so they may have a vested interest when selling you add-on insurance.

The Australian Securities and Investments Commission (ASIC) wants a fairer sales process for consumers and is seeking feedback from the public on reforming how caryards sell add-on financial products, which excludes comprehensive or compulsory third-party insurance.

The commission has proposed to introduce a deferred sales model, which would restrict car dealers and finance brokers from selling add-ons to buyers for four days after the buyer has purchased the car.

ASIC has also put forward the use of ‘knock-out’ questions to filter out the extras that would be of little or no value to buyers and should not be offered.

In the meantime, here are some things you should consider if you’re looking at purchasing car add-on financial products.

1. Do your research beforehand – Don’t rock up to the dealer expecting to make a decision on the spot. It pays to know what add-ons you will need before arriving. Consider using RateCity’s car loan calculator and see how much your repayments bill would be when you factor in the cost of add-ons. 

2. Stand your ground – Don’t be swayed by a dealer telling you it’s a great deal. If you didn’t think you need the extra after doing your research, chances are you still don’t need it after meeting the dealer. Remember, car dealers get paid for what they sell, so you might be following their lead, not your own. 

3. Determine the right level of cover – Make sure you’re buying the level of cover that suits your needs to avoid paying too much and being over-insured. You might be sold insurance that covers a longer period than you really need (for example, if your car’s mileage is reaching the insurance policy’s expiration limit). Weigh up the information and come to your own conclusions.

4. Are you getting enough bang for your buck? – Perhaps you’ve decided that you do need extra cover, but are you getting value for the money you are paying? Sometimes it’s hard to know when you’re being offered the product on the spot by the car dealer. Try to find out if the premiums will be worth the potential payouts and in what circumstances will they accept claims.

5. Check, check, check – Go through the product disclosure statement before you sign anything. It won’t be the most riveting read, but it will pay off in the long run. One thing to potentially look for are duplicates, so make sure you're not buying extra cover for something you might already be covered for.

What if you think you’re potentially being ripped off? 

If you believe the add-on insurance you purchased was sold through an unfair sales process, get in touch with the insurer’s complaints team. If that doesn’t get you anywhere, you can escalate your complaint to the Australian Financial Complaints Authority, which is an independent body that many add-on insurers are a member of. For more information on how to complain, check ASIC’s MoneySmart site.

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Learn more about car loans

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

How much is my car worth?

If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.

Your car’s worth can depend upon various aspects, including:

  • Age
  • Condition
  • Model and make

A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.

Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

Can you put a deposit on a car to hold it?

It’s up to individual car dealers to decide whether to promise to hold on to cars in exchange for deposits.

Some car dealers will request a deposit and promise, in return, to hold on to the car for a certain period of time. Others will request a deposit but make no guarantees, other than to return the deposit if they end up selling the car to someone else.

Some car dealers ask for deposits; others don’t. If you get asked for a deposit and you decide to pay it, make sure the dealer gives you signed paperwork before you make the payment and a receipt after you’ve made the payment.

What is trade-in value?

The trade-in value is the price you could realistically charge if you were to sell your car to a dealer while buying a replacement vehicle. Generally, a car’s trade-in value is less than its market value. That’s because the dealer has no interest in buying your car unless it can make a profit – which can only be done if the dealer has room to increase the price.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

How much can I get towards a new car as a single parent?

It really depends on your financial circumstances as to how much a lender will grant you towards a new car as a single parent. With most lenders, the smaller the loan you apply for, the higher your chances are of approval, so getting a cheaper car or adding some savings of your own, may be a valid option if you are struggling for approval on a car loan.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.