How should you pay for your new car?

Personal Finance · 05 Aug 2019

Looking for a new set of wheels? If, like many people, you’re not in a position to buy a car outright, it’s a good idea to check out all the…

Looking for a new set of wheels? If, like many people, you’re not in a position to buy a car outright, it’s a good idea to check out all the finance options available to you from dealer finance to personal loans.

The time to do this research is before you even set foot in a car dealer’s yard, so you can begin your search armed with all the facts.

Secured vs unsecured loans

The big difference between a dedicated car loan and a personal loan is that a car loan is usually secured against the car you’re buying and personal loans can be unsecured.

If your new car is security against your finance, it means it could be repossessed if you fail to make payments on the loan. An unsecured personal loan means no assets are put up as security against the loan so, if you have trouble making the repayments, the car can't be repossessed.

Finance through a car dealership may offer a lower interest rates than some other options but before making a choice about how to finance your vehicle it’s a good idea to be clear about how repayments will be structured. Some finance options include balloon payments, which means you may pay less each month, but will be asked for a lump sum payment at the end of your loan term. If your car loan includes a balloon payment you need to consider saving for that lump once you've made the other repayments.

Consider your loan purpose

If you’re considering taking out finance for a car loan, it can be a good time to take an overall look at your finances and your other needs. Car finance through a dealer can usually be used only to buy a car, but with a personal loan you have the flexibility to consider other things as well, such as debt consolidation. This may help you pay off some other existing debts, such as credit or store cards, by incorporating those into your loan, leaving you with only one bill to consider each month.

There may also be other items you need to buy alongside the car, such as car seats. With a personal loan, you might be eligible to borrow more than the cost of the car so you have the funds to buy everything you need to get your new vehicle set up.

The benefit of planning ahead

If you apply for a personal loan before buying your car and your application is accepted, you know exactly what your car spending limit is, making it easier to keep to your budget and repayments you can afford. It can also make your negotiations with the car dealer easier if you know you can’t go over a certain price.

Do the maths

Most loans, whether they are through a car dealer, a bank or a personal loans company, will have fees and charges attached to them. To know which is the best loan for you, work out the total cost of the loan, including those fees and charges and the interest you’ll pay over the life of the loan.

MoneySmart has helpful loan calculators to help you with this. Plug in the details for each loan you’re comparing and note down the total costs. Or you can try Harmoney’s loan calculator to for a guide to how much you may be eligible to borrow.

Should I extend my mortgage to buy a car?

This is a common way for a lot of people to pay for a new car. And it can make sense, particularly if you don’t want to worry about having an extra payment per month. Before you proceed though, it’s a good idea to work out the total cost of doing that. Those MoneySmart calculators can be a big help with this too.

The trick with extending your mortgage is that you can end up making car payments over a longer term, so you end up paying more interest overall even though the rate is lower.

If you do choose to extend your mortgage, it’s a good idea to try and make sure your payments are set to pay off the new borrowing over as short a term as possible. For comparison, car loans are often paid off over 24 months and personal loans over periods up to 5 years.

Now you’ve got the lowdown on the various ways of financing a car, you can approach car dealers with confidence.Good luck!

Other articles you may be interested in:

Welcome to Credit Score Bootcamp

Personal loans: how do they work?

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