Whether you're buying a new car or opting for a pre-loved model, you’ll face a smorgasbord of finance options. When considering a loan for your new set of wheels, here are some tips for choosing wisely.
Car loan vs. personal loan
Don’t be confused if you hear the term ‘car loan’ used interchangeably with ‘personal loan’. A car loan is a personal loan that is used explicitly for purchasing a car.
As with any loan, you receive the money for your car upfront, and you agree to comply with regularly scheduled repayments. Depending on the term of these payments, you could have your car paid off in 12 months or stretch it out for up to six years.
The type of loan and interest rate offered will depend on whether the car is new or used, how old it is and whether you purchased it from a dealership or through a private sale. Similarly, your creditworthiness will be under the spotlight, so it’s a good idea to check your credit file in advance of making the loan application. If your credit score indicates you are a higher risk borrower, you are likely to pay a higher interest rate.
Secured car loan
With a secured loan, the car you are buying can be offered up as a security asset. Eligibility for this type of loan may be restricted to brand new vehicles or those only a few years old. The interest rate is usually lower, but there is a risk you may have your car repossessed if you fall behind on your repayments. If this happens, you are liable for the full amount outstanding, which means repaying the lender if the resale value of your car does not pay off the total amount outstanding.
Unsecured car loan
Unsecured car loans are commonly used to purchase second-hand cars. You won’t need to offer up any security, but there might be restrictions on how much you can borrow. If you fail to make your repayments, your lender has the right to pursue legal action against you to recover its money.
Interest rates are usually higher with this type of loan because the lender is taking on more risk.
Fixed or variable car loan
With a fixed rate loan, you have the stability of knowing what your repayments will be for the life of the loan, even if interest rates fluctuate. On the flip side, you don’t have the flexibility to make extra repayments or repay your loan early without incurring a penalty fee.
By contrast, variable car loans typically allow for extra repayments, which means you can save on interest by paying down your mortgage faster. The trade-off is that these payments may vary if interest rates change, making it harder to budget.
Check the car’s finance history
If you’re buying a second-hand car, check that it isn’t already under finance or used by the seller as security for a loan. If this happens and the loan is not repaid, the credit provider can still seize the car from you, even if you have already bought and paid for it. Use the online Personal Property Securities Register or other relevant search registers to check these important details before you make a purchase.
Find a car loan with terms, repayments and features tailored to your budget by contacting your local Yellow Brick Road adviser.
**The information on this article contains general information and does not take into account your personal objectives, financial situation or needs. If you require further information don’t hesitate to contact the branch directly.