Understanding car loans and car finance in general, requires a lot of planning and adequate research, especially if it is the first car you are purchasing on your own. Understanding the entire process of getting a new car with the help of a loan would greatly facilitate the decisions you have to take during the different steps.
The full cost of buying a new car
Being aware of the often unforeseen costs such as interest rates when having taken an auto loan, car dealer taxes, and car insurance prices is key to getting an approximate number in your head of how much actually the price of the car would accumulate to.
There is a group of initial costs that need to be considered and those include registration of the new car, stamp duty, dealership fees, GST and a deposit. Moreover, there are running costs such as repayments of the car loan, servicing, fuel, car insurance, and renewal of registration of the already used car after a few years.
How to pay your first car, car loan or cash purchase?
Getting your first car can be frustrating and the first thing to consider after choosing a vehicle is to calculate the total cost and pick a buying option. There are a variety of car loans but they are generally better to pick than personal loans, simply because the interest rates are lower, especially in the case of a chattel mortgage.
Paying in cash has always been the simplest option there is. No one would check your credit report (credit scores, credit history, credit card usage) and you would even avoid filling of unnecessary documents. Moreover, paying in cash most often results much cheaper but requires you to pay in bulk. However, car buyers who do not have extra funds to spare prefer taking loans for a reason.
Generally, if you have a bulk of cash at your disposal to cover all the costs and have a secure emergency fund that can cover your living expenses for at least 6 months ahead, you can afford to pay in cash, otherwise asking for a loan from a lender might be the better idea.
Types of car loans and their loan interest rates
1. Chattel Mortgage
In Australia, chattel mortgage is the most common auto loan for business use. In that case, the lender buys a car for the client and lets them pay the full purchase price with interest rate through a series of equally distributed repayments during the loan term. The vehicle is used as a security mortgage.
2. Standart Car loan
The standard car loan usually lasts 65 months for used cars and 69 months for new cars. It is the most common. The down payments are divided equally among the term. A personal loan would usually carry a higher interest rate, thus this option is better suited because of its lower interest rate. However, an upfront deposit might be required by the lender to secure the loan. The shorter the life of the loan is, the higher the repayments that the borrower needs to make.
3. Novated Lease
The novated lease is a three-way agreement between a company, an employee and a financier. All repayments are taken from the pre-tax salary of the employee, where the employer pays directly to the lender party.
Disclaimer: Novated leases are unsecured financial products that sometimes carry hidden charges along with the loan repayments, thus having a good idea of the overall purchase price is highly recommended before signing an agreement on a new loan.
Differences between buying and leasing
Leasing can allow you to choose whether you want to refinance and upgrade with a better car later on and require little to no capital upfront. It is a good option for small businesses that do not feel comfortable to disrupt their steady cash flow with a large investment. The downside is that you are not allowed to modify the vehicle or claim it as an asset to your business.
Buying a vehicle lets you own the vehicle right from the start and you can modify it or use it for tax deductions if you own a business. Regardless of the type of car loan you choose to take, the Australian finance companies usually require an initial investment, referred to as a deposit, to secure the loan.
Buying new cars vs buying used cars
Regardless of whether you are purchasing a new or a used car, make sure you get a good test drive before committing. The main advantage of a new car is that it comes with a warranty. And buying used vehicles comes with some risk.
On the other hand, some car dealerships offer warranties for used cars. Moreover, buying used comes with the advantage that the vehicle draws lower insurance rates because it costs less. A downside would be higher servicing cost, due to repairs being needed more often.
Benefits of pre-approval for a car loan
Getting a pre-approval for an auto loan before walking into a car dealership might even cut you some of the prices of the vehicle, showing that you are ready to buy and have the funds needed.
Most finance companies allow you to apply for pre-approval online, in person, or even through a phone call. If you are approved, the lender will give you a document that you can show as proof.