So you need a loan to finance a car purchase? We have compiled some "insider"
hints designed to give you the best possible outcome in getting your loan.
Secured loans are your best bet
Cars are best financed using a secured car loan or with security over other
assets you own because the interest rates on secured finance are generally a lot
lower than for a personal unsecured loan.
If you have a line-of-credit mortgage or a re-draw facility on your home
loan, this would be the first option that you would consider to finance your car
purchase because home loan interest rates are typically the lowest of all.
This strategy alone could save you 4 to 6 per cent over a secured car loan
and 10 per cent or more on an unsecured loan.
Vehicle leasing as an option
Depending on your situation, there may be considerable tax benefits if you
use leasing finance.
When you use leasing to finance a vehicle, the finance company is the owner
of the vehicle and you have possession of the car under your lease agreement for
a set term.
At the end of the lease term, you are able to purchase the vehicle from the
financier for the 'residual', an amount agreed to in your lease contract and
could be anywhere from $1 to 50% or more of the amount originally financed.
The higher the residual, the lower the monthly payments and vice-versa.
Whilst you may be able to reduce your repayments dramatically by choosing a
high residual, you should be mindful of the risk that, if your residual amount
is higher than the value of the vehicle at the end of the lease, you may find
yourself being forced to either buy the car above the then market value or
having to sell it and make up the difference out of your own pocket.
Keep the story straight
Be completely open and honest with your broker or lender about why you need
You should also thoroughly and accurately disclose your financial position.
There are a lot of different ways to finance a car and, with a full
understanding of your situation, they may be in a better position to offer a
product more appropriate to your needs.
Car loans outside the box
If you are struggling to get finance from traditional lenders due to your
employment history, residency status or a poor credit file, there are plenty of
There is a considerable number of private and non-bank lenders offering 'low
doc' loans, bad credit loans, etc. These can be best sourced through a finance
You will definitely pay higher interest on these loans but, if you ensure
that you meet all of your repayment commitments on the loan, you will establish
your credit-worthiness for next time you need a loan.
Keeping your lender honest
Somewhere around one in three people who take out a loan wind up overpaying
their commitment due to mistakes made on their loan statement.
These errors can come about due to things as simple as the application of the
incorrect interest rate or additional interest being accrued because of delays
in the lender allocating your repayment/s to your loan account.
You should check carefully each statement that you receive from your lender
and report any anomalies to them immediately.
There are some great software packages around designed to help you monitor
and manage your loan and other bank statements, making the job of uncovering
bank errors easy.
Don't forget that there are more options around than the mainstream financial
Community based banks, micro lenders, credit unions and small finance
companies can all offer very competitive rates and may be more personable to
Bundle and save
Some financial institutions, particularly larger banks and building
societies, offer interest rate discounts for customers who have other loans or
financial products with that institution.
By bundling together a banking package to incorporate your cheque/savings
account, a credit card, your home loan, car loan ... even insurance policies,
the financial institution can pass on their significant savings to you.
Whilst these potential savings can be very attractive, you should be very
careful about changing insurance policies from one institution to another just
to qualify for a better deal on your car loan.
You should ensure that the policy you are switching to is in every way as
good as what you are switching from, otherwise you are putting yourself at
financial risk without due cause.
What about the car dealer?
It is likely that, when buying a new or used car, you will be offered finance
by the dealer.
Whilst having everything taken care of at the dealership may be very
convenient, it is less likely that you will get any real options - meaning that
you are unlikely to get the best deal.
Make sure that you shop around before you sign up - either yourself or using
Get it right the first time
Some people make the mistake of submitting loan applications to multiple
lenders in the pursuit of a loan.
Online lenders make this very easy.
However, every time that you apply for a loan, the lender does a credit check
and, the fact that they did a credit check on you it is recorded on the credit
reporting agencies' files.
The more applications that you make, the more credit checks are recorded and
the more desperate you appear to anyone looking at the file. It will also result
in the lowering of your credit rating.
If you make even a handful of enquiries in the space of a month or so you
will find that getting a loan can become very difficult.
The best recommendation is to talk to a finance broker about your situation
before you start allowing anyone to access your credit file.
A broker can assess your situation and better ensure that your application is
submitted to the right lender first time around.
Compare apples with apples
Finance companies are required by law to use "comparison" rates when
advertising their loan products.
The reasoning behind this is that it makes it easier for the consumer to
compare the total cost of one loan to another.
But remember that these
comparison rates only allow you to compare the total interest and fees that
apply to a loan - they offer no information about the suitability of the
particular products to your specific circumstances, they don't make comparisons
of penalty fees and they don't take into consideration the considerable
differences in features that may exist from one loan to the next.
Before you apply for a loan, there are a few things that you might need to
supply to the lender, so you should make sure that they are ready in advance.
The required documentation will be different depending on the type of loan
and whether you are self-employed.
If you are an employee seeking a loan for
personal finance, for example, you will most likely need:
- proof of
- verification of your more recent employment history
- proof of
income (pay slips and/or personal tax returns)
A self-employed person
or business owner seeking finance for commercial purposes may also be required
Your broker or lender can provide
you with a list of their specific documentation requirements in advance of you
making your application.
- profit and loss statements
- business balance sheet
- tax returns for
- a business plan
- future cash-flow forecasts.
What about a credit card?
Whilst credit cards have a higher interest rate than many of the other car
finance options discussed, it's generally much less hassle to get one and they
afford more flexibility when it comes to how you repay the money.
If you have a dispute of any sort with your lender, you may need copies of
documents including your initial application, payment receipts (including online
ATM or Bpay transactions).
It is likely that the financier will charge a fee to provide copies of this
type of documentation - so it's important that you maintain accurate records of
all your transactions and communications in relation to your loan.