3 WAYS TO FINANCE A CAR
USE EXTRA CASH IN HOME LOAN, LOAN FROM CAR DEALER OR PERSONAL LOAN FROM BANK
Note the interest rate and fees, loan size, repayment period and deposit.
From customisable home loans to rent-to-buy deals, there are a variety of finance options to explore. But first, decide on what you want from a loan.
Loan features
Interest rate and fees The interest rate is often the biggest factor determining the overall cost of a loan. There are at least two things you can do to ensure you get a good interest rate: improve your credit score and shop around. Factor in fees when calculating a loan’s total cost. Loan size Some people decide on a loan amount based on how much disposable income they have; others apply for the largest loan offered. Both are terrible options: they can cause you to overreach, putting you in financial difficulty. Having a financial buffer in place above your disposable income for loan repayments, is crucial to ensure you don’t default on payments. Repayment period A longer repayment period will reduce the size of your monthly payments, but incur more interest. You want to be able to pay off any loan as quickly as possible. Deposit If you take out a car loan, putting down a deposit of at least 10% will dramatically reduce the loan cost, bringing down your interest rate and monthly installments. Finance options Mortgages A mortgage is often the best way to finance a vehicle. The interest rate on your home loan is lower than most car loans; by restructuring this existing loan you avoid the admin of applying for a new loan. But remember, a loan’s term plays a big part in determining its overall cost. If you pay back the amount borrowed for a car over 10 years, it’ll cost much more than if you’d taken out a 36-month car loan with a 5% higher interest rate. Aim to repay this loan in under 48 months. Car loan The best deal for those buying from a dealer will usually be a car loan. This specialised loan accepts a vehicle as collateral, allowing lenders to set a relatively low interest rate. However, if you default on payments, the vehicle can be seized. Expect the following features and conditions:
typically only given for cars younger than 60 months fixed at 36, 48 or 60 months can be structured to include a balloon payment
can involve trade-ins or a deposit, reducing the cost Personal loan If you buy an older vehicle, or one from a private seller, the only option is to apply for a personal loan. As they’re unsecured, lenders usually charge higher interest rates. To reduce the cost, you can improve your credit score (earning you a better interest rate) and make the loan term as short as possible. Avoid paying for a used vehicle entirely with a personal loan. Rather use it to supplement your savings.
Shirley Smith is COO at Old Mutual Finance
This was published on Old Mutual Finance’s blog.