Car Finance 101
Posted on 11 January 2016
Car finance 101
Shopping for a new set of wheels is – as it should be – exciting. The prospect of getting something new (even if it’s used) gets the endorphins going. But perhaps because of those good-old endorphins, it’s also a time when you need to give the detail a good dose of attention. If you are about to start looking for your next car and will be organising finance for the purchase, here are some of the key things to consider.
How much can you afford? Really?
There are two things to think about when working out how much you can afford:
(1) what car loan repayment amount you can comfortably afford each month and
(2) the total amount you feel comfortable spending on your new car when you weigh it up against other goals.
On the first point, if you’re one for doing the household budget sums in your head, now is the time to sit down with a pen and paper and list all of your monthly expenses. You might also try writing your list, leaving it for a bit and then coming back later to review it. It’s amazing how many common budget items – the power bill, petrol etc – can be missed initially. Once you have a crystal clear picture of your budget, you’ll be able to work out what car loan repayment amount you can comfortably afford each month.
On the second point, even when monthly repayments are an affordable amount, make sure you are completely comfortable with the total amount you will be spend over time. While a more expensive car could be paid off over a longer period of time and therefore would work with the monthly budget, do you really want to spend that extra cash? Will it get in the way of other goals.
Car loan Interest rates and getting the best deal
First things first, know what’s being offered by different lenders. While car loan interest rates are - on the whole - determined by the qualities of individual applications, it is good to know the ball park you can expect to be offered.
The second and perhaps most important thing is this: ask, don’t assume. Don’t assume your lender is providing you with the best deal they can until you have asked how they arrived at the interest rate offered. Car loan interest rates are determined by a range of factors –credit history, living and work circumstances etc – and some lenders are better at understanding their clients and how to offer the sharpest rate than others. Be active, not passive in your interest rate negotiations.
Resist the temptation to spread it out
Spreading your car loan over a longer period time to reduce the monthly repayment amount can be hugely tempting. But take a moment to weigh up the difference between the short and long term. The longer you have your car finance for, the more you will pay in interest. If your household budget can afford monthly repayments that will pay off the loan in two years, it’s better to get it done in that time rather taking longer.
Car loan fees and transparency
By law, all lenders in New Zealand have to provide full and transparent disclosure of all fees and charges, including default fees etc. Forewarned is forearmed so before signing on the dotted line, make sure have seen and understood all information relating to fees and charges.
The power of pre-approved car finance
Here are two key reasons why pre-approvals make good car shopping and budget sense:
(1) A pre-approval takes the rush out of car finance. It gives you time to properly assess what you can afford and ensure that you’re dealing with a lender that will offer a good, responsible loan for your needs. Rather than scrambling for finance after finding a car that you want to seal the deal on quickly, a pre-approval puts you in the driver’s seat with time on your side.
(2) Pre-approved car finance helps you stick to your budget and improves your negotiating power. Car shopping – like any form of shopping – is fraught with temptation to spend just that little bit more. Organising pre-approved car finance before you go shopping is a great way to make sure you stay within your budget, and means you can focus your energy on negotiating price within what you can afford.
If it’s a no, you can fix it
Sometimes lenders decline car loan applications and while it can be disappointing, the reasons are usually in the best interest of the applicant. It’s not good practice to lend someone money when the signs are there that they will find it difficult to pay it back.
If lending is declined, remember today’s decline can turn into an approval in the future if you work with the lender – the ball is in your court. Two key things to remember if your lending is declined are:
(1) find out from the lender why the loan was declined and what you can do to resolve the issue so that you can reapply down the track;
(2) take a breath and consider your options. Don’t fall into the trap of shopping your application around far and wide; every time you apply for finance it is recorded on your credit history, and too many applications is not a good look.
If you’re getting ready to go car shopping and would like to talk your car loan options, give the team at Online Car Loans a call. We’ve helped thousands of Kiwis get on the road by providing them with a car loan that works with their budget.
Please note, this article does not represent personal financial advice.