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Car Loans
Guide to Car Loans
Can You Afford a Car?
It may seem like an obvious, basic question but, before rushing out, choosing a car and trying to arrange a car loan, we need to ask ourselves whether we can afford a car.
After a home loan, a car loan is probably the single biggest piece of financing many Australians will organise in their lifetimes so, as always with major personal financial situations, it's important to run the sums first.
Creating a Personal Budget
Assuming you don’t have the cash lying around, if your bank balance is not as flush as you would like it means that you will have to take out a car loan if you have decided you really need a car.
This may mean some time spent working out what your current income and liabilities are so that you can work out how much excess cash you have at the end of every month once all the essentials are paid for.
If you don’t do this already then it's a good idea to get into this habit anyway, as it will stand you in good stead for keeping on top of your personal finances in the years ahead.
Use spreadsheets, budget planners and financial calculators to help you create a list of all your incomings and outgoings.
If you know it doesn’t leave much spare at the end of the month then this process can help you identify areas where savings can be made.
Using this method you can come to a figure of what you can afford to borrow and that will help determine the loan you can aim for and the type of car you can afford. It will tell you whether you can afford a car now or whether you would be better off waiting for a few months, trying to save more for a larger deposit and paying less interest on the loan.
Or maybe you can consider a good second-hand car instead of a brand new one?
Important!
Remember when you are budgeting for a new car it is not just the cost of the car itself. Along with a car comes running costs like petrol and repairs, insurance, tax, general maintenance, annual registration fees, roadside assistance fees and tolls.
Do Things the Right Way Round
Many people go through this process the other way around – choose the car they want and then work out what they can afford: this can lead to disappointment, financial difficulties and even a repossessed car.
The Ferrari may have to wait a while!
Tips for Saving for a Car
You've done your sums. You've come to the conclusion that things are just a bit tight right now to apply for a car loan and you think you’d be better off saving up a few thousand dollars more, taking out a smaller loan in the near future and paying less interest over the term of the loan.
How do you go about targeting when will be the best time to buy and using your savings to help you get there?
Determining How Much You Need to Save for Your Car
If you have already found the car you want remember that the price may have changed by the time you buy it and remember to compare prices again nearer the time.
You should incorporate the following charges into your overall financial plan for your car, on top of the actual cost of the car, to achieve a full picture of what you will need to save:
- Registration transfer fee. Approximately $25, depending on your State/Territory.
- Stamp Duty. This will depend on your State or Territory again, but will usually be around 3% of the value of the car. So a $10,000 car will attract a $300 stamp duty.
- Car Insurance. Depending on your age and car-driving experience and the type of car you buy this can be a large chunk per year. You should get the Compulsory Third Party (CTP) insurance which covers other people in a car accident and Comprehensive Insurance which covers you.
- Other Running Costs. Don't forget that on top of the above costs, you will have monthly running costs that will include petrol, tolls, repairs and general maintenance, as well as extras to pay for roadside assistance memberships.
- Tax implications. Speak to your accountant to consider the tax implications of you owning a car
You may find when you factor in all of the above then a car you pay $X for will actually cost you $X plus 30 or 40%, not including the monthly running costs and the annual renewal payments.
Raising Money and Cutting Costs
The more you save the better you will feel about driving your new car off the dealer's forecourt, because it will mean you have less to pay off on the loan.
Unless you are very fortunate you will need some sort of loan to buy your car – it's a question of balancing some savings with a loan to help you along.
Youngsters may need to think of ways to generate money – part time jobs are great if you old enough or even doing some work for the parents. You can ask for contributions at birthdays rather than people giving gifts.
These efforts can be balanced with saving costs. A personal budget will help you to identify where your money's going every month and you should be able to work out where you can save money.
Youngsters who are first time car buyers will have fewer expenses to consider, especially if they are living at home, but a personal budget doesn’t hurt for them too. They may be able to reduce their outlays and save more.
Other car buyers may be able to reduce spending on things like supermarket shopping trips, reduce the number of times they eat out, stop alcohol or cigarettes etc.
Smart Saving
Make some realistic savings targets. Make sure you have a good savings plan that you stick to and a good savings account that will help to grow your money with as high an interest rate as possible.
Try to choose an account where you won't be tempted to withdraw money and that locks your money there for a period of time, but that you can grow with extra payments. You can compare bank account offers online on the LowerBills site.
You can also use the savings calculator on this site to help you with setting your targets and working out how much you will save.
Tips for Buying a Car
You've passed your driving test, got your license sorted out, done your personal budget and worked out approximately what you can afford and when you can buy it.
You've saved the money up and the time has arrived to actually buy a car.
Here are some tips on other things you need to consider before and during your trips to the dealers, so you don’t get stung with a lemon or a car that just doesn’t work for you!
The Right Type of Car
Manual or Automatic?
When you passed your test was it in a manual car? If so, you may be able to save money on your car by opting for manual rather than automatic.
Size of Car
Small cars generally cost less to run – in terms of petrol costs, registration, servicing and tyres.
They are also better for the environment. Ask yourself whether you really need that larger car you had your heart set on, because of its looks. A smaller model will often do for mainly city driving.
New or Second-Hand
Buying second-hand involves more of a risk, but it can be a great money-saver if you take the time to research and you know what you’re doing.
What is The Re-Sale Value?
When you have identified a few models that fit the bill you can check online what the normal re-sale value of the car is so you can weigh this up when you make your decision.
About Your Budget…
It's important that your hard work earlier in working out what you would need to save and how to get there – and then actually doing the saving – is not wasted.
Stick to the budget you made and don’t be swayed by how good some of these new cars look, if you know you can't really afford them!
Online dealers will give you some ideas about what you might be able to get for your money and when the time comes to buy don’t go over your maximum price.
Check the Rego!
If you are buying a second-hand car, always check the registration expiry date. Otherwise you may be left with another big bill shortly after you purchase the car, as you will have to renew the rego and maybe make it roadworthy by making some expensive repairs, as well as arranging the insurance. If you can get a car with a long rego period then this can help with reducing initial costs.
Best Place to Buy a Car?
Here you have several options – namely buying from a private seller, going to a car dealer and buying or getting a car from an auction.
Private Sale
With a private sale you buy a second-hand car directly from the owner. Make sure that the owner has up-to-date registration papers, the pink slip (safety check report) and proof of ownership. Buying privately means there will be no warranty so it's important to get the car checked out thoroughly before you buy.
Also you will need to check ownership to show that the owner actually does own the vehicle. This can be done online at the REVS web site for your state or territory or, in Victoria, at the Vehicles Status Checks web site.
Car Dealer
The main benefits from buying from a car dealer is that you get a minimum 3-month warranty on a car under 10 years old (and less than 160,000 Km on the clock) and there is no risk of a previous owner owing money on the car. However, the price can be more expensive as the dealer will make a "mark up" on the price.
Some dealers can try and pressure you into buying and this is something to beware of. Make sure you have checked the car thoroughly before committing to anything. If the dealer wants a holding deposit then get a receipt.
The dealer may offer you finance. If you have not pre-arranged a car loan then this is an option but you may well get a better deal elsewhere.
Auction
Auctions are a great way to pick up deals on cars if you know what you are doing. The downside is that no inspections are allowed, there is no warranty and no test drives. It takes a lot of research to buy successfully at auction and you will have to check the payment and deposit conditions of the auction house in question.
Valuing and Bargaining on a Car
Don’t forget that it can never do harm to try and bargain for a car – be it a private sale or with a dealership. Especially during hard economic times it can pay to ask for discounts. A quick sale is often a big advantage to a seller, so they may be prepared to come down in price to guarantee the sale.
You can always compare prices online for similar quality/age/mileage cars so that you know what the average price is for the model you’re considering. This will give you a benchmark.
A good rule of thumb to use during a private sale negotiation is to make the owner name his price first and then try to work it down.
Vehicle Inspections
If you are buying a second-hand car, are not particularly car-savvy yourself and don’t have a friend who is, you will want to consider spending a couple of hundred dollars on a professional car inspection.
This can save you money further down the track or actually convince you that it's not worth the asking price. An under the bonnet check will be much more thorough than a mere cosmetic check, a check of the odometer and log book and a test-drive.
You can get a qualified mechanic from the driving associations like RACV or the NRMA which can take care of the inspection for you.
If you are inspecting a car yourself then you can do a few basic rust checks; sometimes rusted areas are hidden by fiberglass filling so you can wrap a magnet in a cloth and run it over the car to check. You should also check the suspension, tyres and any leaks.
New Car Deals
If you decide to buy a new car, then look for the end of year "run-out sales". Here you can often pick up a bargain if you don’t mind not having the very latest model.
Also time your visit to the dealer – sometimes you'll get a better deal by buying near the end of the month when the dealer is preparing his monthly sales figures and has payments to make. Maybe your sale can help him meet his target. Statistically Monday is the best day to buy a car!
Car Loans –Starting Guidelines
Basic Principals
Car loans are personal loans made for buying a new or used car. The amount of money that you borrow will be repaid over an agreed term of a loan that will usually vary from 12 to 60 months.
The credit contract you sign with the credit provider will details all amounts and repayments to be made.
Car loans are principal plus interest loans. The interest rate may be fixed or variable.
The former type is far more common and with these the rate stays the same throughout the term of the loan so that the borrower knows exactly what set payments there are; in the latter the rate can go up or down, so repayments will vary accordingly.
One feature of car loans that differs to other standard loans is the "balloon" or "residual" payment, which is a lump sum you can arrange to pay at the end of the loan term in order to lower your monthly payments. At that time, if you don’t want to pay it, you refinance the loan.
There are also fees and charges to be paid on car loans and these can be in setting up the loan, monthly charges or early termination charges – similar to home loans – in that the lender may have a set charge if you want to make additional payments to pay off the loan early.
These charges can offset the savings you make on the interest payments, so they need to be carefully considered.v
Places to Arrange a Car Loan
Most standard credit providers (banks, building societies, credit unions and other lending institutions) will provide facilities for a car loan.
As usual, there will be credit checks and you will have to satisfy the lender of your ability to repay the loan in the time stipulated, before they will grant the loan.
Normally you will have to be in a steady job and show proof of adequate income. See below for types of loan usually offered.
If you buy your car from a car dealer they may also offer a financing deal for your car purchase. This is a convenient option but it can be far more expensive with higher interest rates.
Different Car Loan Options
Secured Loans
Most people in Australia arrange a secured car loan because they have lower interest rates and are therefore more attractive to borrowers. Lenders also prefer them especially for new cars.
The actual car provides the security for the loan and this can be repossessed and sold by the lender if default on the loan occurs. Loan terms are usually 1 to 5 years and more often than not they are at a fixed rate of interest.
Many credit providers have a minimum loan amount – around $5000 for example – and may specify a minimum age for the car, unless it is a classic or prestige type of vehicle.
Unsecured Loans
Interest rates are higher on unsecured car loans. Usually there will be a minimum/maximum borrowing amount stipulated and loans will usually be up to 5 years.
These are more common for older, used cars, than for new cars, and are generally harder to get for borrowers, who will have to provide firm evidence that they can afford to repay the loan. Defaults may be settled in court.
Deposits
If your loan approval status is uncertain, putting a deposit down can often improve your chances of getting the loan. Often though, no deposit is required.
Balloon Payment or Residual
This is a feature of car loans that you don’t get on home loans. It is a lump sum payment to be made at the end of the loan term, which reduces the monthly payments.
If you don’t want to pay off the residual then, you can refinance the loan and continue paying off the car over a new loan term.
Many people sell their car after this time anyway, so that they have to arrange a new loan anyway.
Repayments on Loans
Depending on the conditions of your loan, repayments can be made fortnightly or monthly – and this will either be by direct debit, cheque, BPAY, internet banking, direct payroll or cash.
Making extra payments on your loan will reduce the term and therefore the interest charges so this may be a great option for you, if you are in a position to do so.
However, careful of the terms and conditions of your loan, which may slap a significant charge on you for doing this.
Tax Implications
Despite being a personal loan, depreciation and interest charges could be tax deductible if you use the car for business-related trips. Talk to your accountant about this.
Fees and Charges
Be sure to check all fees and charges attached to the loan. Your credit provider must make you aware of all charges: start up, ongoing and early termination.
Low Doc Car Loans
Some credit providers will allow you to make a Low Doc Car Loan application, if you cannot provide all the necessary documentation (2 years of personal and business tax returns) required for a standard car loan.
The Leasing Option
Another option in Australia these days is to lease a car rather than buy it, though this is not particularly popular at present.
This means that, instead of owning the car outright at the end of the repaid loan, you hand the car back at the end of the lease term and take out another lease.
Often the rationale for doing this is based upon tax reasons (especially the case for prestige and luxury cars) and so, if you intend to use your car for business, discuss this option with your accountant.
Smart Car Loan Comparison and Online Application
Comparing car loans is equally as important as comparing cars and car prices, because it's equally as important that you get a good deal on the loan as the car.
They do vary considerably from car yard finance deals to those you will be offered from credit unions, to bank deals and those you will find online.
We at LowerBills aggregate the best car loan deals so that your choice is made a little easier.
Approval in Principle
It's advisable that once you have done your sums on what you can afford to borrow you seek "approval in principle" for that amount from a credit provider, so that when you find the car deal that you want, you can push ahead with finalising the loan immediately.
This will mean no hold-ups – you'll certainly be anxious to get behind the wheel after all the hard work getting there.
Approval in Principle is also a good idea because it ties you to a certain budget and you won't be tempted to look for cars over this amount, which you cannot afford; you can just concentrate on getting the best car for the money you have.
Bargaining for Better Rates
Shop around for the best car loan deal possible and, if you are in a position to do so, ask the credit provider for a better deal.
They may agree to improve their rates, especially if your credit rating is good and you represent low risk.
Don’t be Fooled – Check the True Cost of the Loan
Like with all loans, don’t just measure them by the interest rate being offered.
Factor in all of the fees and charges. Most credit providers will have an establishment fee, monthly admin charges or penalties for early pay out, or all of the above, but check this first.
When you compare car loans make sure you are comparing like for like and not being misled.
Car Loan Comparison Rates
Comparison rates are a good way of comparing car loans accurately, because they consider not only the interest rate but also the known fees and charges (start up and monthly) associated with the loan.
This is a truer indication of the total cost of the loan, as fees and charge scan really add up and change the whole complexion of a loan.
It's important to remember that the comparison rate does not include any government fees, the costs of insurance products or event-based fees, such as early repayment fees, which may not apply.
Other Features to Compare with Car Loans
Comparison rates represent the single most accurate way to compare car loans purely on a cost basis, but there are other factors that will affect the flexibility of your loan, such as redraw or direct debit facility, loan portability and repayment options.
Use a Car Loan Calculator
The LowerBills Car Loan Calculator is a tool which provides you with a detailed snapshot of the repayment figure of a lease or hire purchase facility.
It is a wide-ranging calculator that takes into account the stamp duty relevant to the state of purchase, residual at the end of the term and GST on the repayment amount. In the same calculation it allows you to compare a car loan with two different balloons/residuals.
This calculator can help you compare different car loans and see which one suits you best.
Summary - 6 Steps to Getting a Smart Car Loan
1. Work Out What you can Afford to Borrow
2. Shop Around for the Best Deal
3. Make Sure you have the Right Product from the Right, Accredited Provider
4. Make Sure you Keep Up with your Repayments
5. If you are having trouble with Repayments then Seek Assistance or some free Financial Counselling
6. If you have Problems with your Credit Provider you can make a complaint at the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Ltd (COSL)
Applying for a Car Loan Online
When you apply for a car loan online with LowerBills you will be directed to a secure server and you will make your loan application directly with the loan provider.
There will be a list of the appropriate information and documentation that you will need to provide to enable the provider to process your application.
Make sure you have all of this documentation to give yourself the best chance of approval.
Getting Approved for a Car Loan
Check Your Worthiness to Borrow
Before applying for a car loan it's good to know how credit-worthy you are so that you are well prepared for your application.
If you’re not sure what your credit rating is then you should apply for a credit check here, here or here (for Tasmania). A free copy of your credit report will be with you in around 10 working days.
If you know you have a bad credit rating then you should take steps to improve your credit score – see our blog article on steps that will help you do that.
This is important as showing potential lenders that you are taking steps to become more financially responsible will make them feel more comfortable lending to you and interest rates will be lower.
Getting favourable loan conditions can save you a lot of money and stress.
Improving your Chances of Approval for a Car Loan
- Check your credit rating – if there are any mistakes have them corrected with the right authorities
- If you have bad credit take steps to improve your credit rating
- If you have a mortgage that you are meeting payments on this is likely to help you with your car loan
- Ensure that you have been in stable employment for a number of years and can demonstrate it
- Choose a realistic amount for your loan, based upon your own income and liabilities
- Show any savings and assets that you have. Showing a track record of savings will help you
- New or near-new cars are considered less risky by lenders as they can be used to secure the loan. An older car will have lower resale value and provide less security
- If you are a first-time borrower looking for a car loan, you may find that a guarantor underwriting your loan will help. Relatives with a good credit history may help convince a lender that the risk is minimal.
Last Chance Finance
Some credit providers for car loans will offer a secured loan product especially designed for those either with a bad credit rating and finding it difficult to get loans any other way or for someone new to Australia finding it difficult to prove any history of credit.
You won’t be surprised to hear that these loans are normally relatively high interest because the risk is considerably higher.
Don’t Forget Car Insurance!
Types of Car Insurance
Compulsory Third Party Insurance (CTP)
This insurance covers injuries and damage to other people and their property, if you are involved in an accident. This must be arranged before you take your car on the road.
Comprehensive Insurance
This covers injuries to you and damage to your car, if you are involved in an accident. This is strongly advisable because car accidents are usually expensive.
If you have a loan that is secured by a mortgage you will probably be required to get comprehensive insurance.
Again, to get the best deal the key is to shop around – you don’t have to arrange it through your dealer.
Third Party Property Insurance
Third-party property insurance is an extra insurance, on top of the CTP insurance, which covers you for damage to other people’s vehicles or property that is not covered by your CTP.
Loan Protection Insurance
This is an option you can take that covers you if you can’t work to repay your loan, due to injury, sickness or redundancy. This is generally not good value for money and most people don't take it.
Gap Cover Insurance/ Shortfall Insurance
This is another option that most people don’t bother with as it can be expensive.
If your car is stolen or written off in an accident before you have repaid the loan, the insurance covers you by paying off the loan if there is a gap between the value of the car and what you owe.
Extended Warranty/Mechanical Breakdown Cover
This is a facility that covers the cost of repairs, parts and labour costs for your vehicle, with the exclusion of normal wear and tear. With this it is important to check restrictions and conditions about things not covered.
Also double-check that there are extra benefits over and above what the standard warranty offers.
Beware….!
You may come across car dealers who try to push these insurance options upon you. You only need the first two types of insurance listed above; most people will not need the other options. Only buy the add-ons that you need.
Youngsters and First-Time Car Buyers
First time car owners and youngsters will have to pay considerably higher premiums than older, more experienced drivers. One cheaper option is to be added to your parent's policy if your insurer allows this.
Once you have been on the road for a year or two, without any claims, you should find that you can shop around for better deals on your insurance and you will have bargaining power.
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