You’ve found a car that you love. The colour is perfect, the size is just right, and it drives like a dream; but the price tag is a problem. Car financing provides a way for you to purchase your favourite vehicle without emptying out your bank account. You can buy a car and pay it off while you drive, instead of waiting until you've saved enough cash.
In order to navigate the world of car financing there are some factors you need to consider.
As with personal loans, car finance is provided by a lender. When you find a loan that suits your personal needs and matches your financial situation, you can use it to purchase your vehicle of choice.
Once you secure the finance you’ll be subject to interest rates, and will have to repay the loan based on the terms set out in your agreement. These terms are set by the lender and may include additional fees and stipulations, as well as built-in penalties for failing to make payments. Make sure you take the time to compare finance options from different lenders so you get the best deal on offer.
Types of car finance
There are various types of car loans, offering different options and terms. Look at all the options available and decide which one is right for your personal situation.
Unsecured loans. The opposite of a secured loan, an unsecured loan is one without any collateral. They usually attract higher interest rates and fees, as the lender has more to lose and no protection against default.
Dealership finance. This is a car loan arranged through a car dealership. Dealerships usually have their own agreement with a financial institution, which includes set terms that they use to offer finance options to buyers. The loan is paid directly to the dealer and its finance company.
Fixed and variable rate car loans. If you take out a loan with a fixed interest rate, the interest stays the same throughout the term of the loan. You will miss out if the rates fall, but you will always know how much your repayments are going to be. It's harder to budget if you have a variable rate as they can change with market fluctuations. You benefit if rates go down, but your repayments increase if rates rise.
How to compare your car financing options
All loans are not created equal, and some may have stipulations that can hurt you in the long run. With any type of finance you should shop around for the best deal, and compare options to find one that fits your individual circumstances. Here are a few things to consider:
Fees. Loans can have additional fees attached to them that you’ll have to pay. Compare such things as application fees, annual fees and other additional charges, and choose the loan that is the most competitive.
Repayment options. Some loans may include the option of paying in instalments that line up with when you are paid, whether that is weekly, fortnightly or monthly. Others might allow you to make additional payments to pay off the loan faster. Consider the repayment options on different loans to find one that best suits your circumstances.
Rates. Interest rates can vary depending on the lender. Look at different lenders to see which is offering the best deal, and decide if you’d rather pay a variable or a fixed rate.
Loan terms and amount. Some loans have a minimum amount, which may be higher than the actual amount you need. Be sure to choose the loan amount that best fits your needs. You should also compare the length of the term, as some loans can be for as little as one year while others can stretch up to seven years.
Flexibility. You might need a loan that offers some flexibility when it comes to repayments. Some may allow you to pay more than the designated instalment amount, so you can pay off the debt faster. Others may offer discounts for bundled package, such as a car loan and personal loan combined.
Restrictions. A car loan can come with restrictions that don't meet your needs. Some lenders may only allow the borrowed money to be used towards the purchase of a vehicle. Others may dictate that you pay designated amounts at set intervals. Compare restrictions between loans and find your best fit.
What you should watch out for
There are pros and cons when it comes to car financing. However, if you take the time to compare different loans, and do your research on restrictions and fees before making a choice, the process will run more smoothly.
You should make sure you can comfortably manage the loan financially. You don’t want to end up defaulting on the loan because you can’t repay it. Failure to repay can be an even bigger problem if you chose a secured loan, since the lender has the right to repossess the vehicle and sell it to repay their loss.
How to apply for car finance
Once you’ve compared all the options from our comparison table and decided on the best loan for your financial situation, you can apply simply by hitting "go to site". Each institution has its own policies and qualifying rules, but there are some general principles that most lenders follow.
When you apply you need to have proof of your identity on hand. This includes personal details such as your full name and date of birth.
You also need to present financial information that includes your income and credit history, including details of any debts, liabilities or obligations.
You need information regarding the car you intend to buy, including the make, model and value, especially for a secured loan.
Working out car financing may seem a little overwhelming at first, but if you take one step at a time and do the research, you'll have a clear understanding of the best option for your needs. Once your finance is set up, you can finally get behind the wheel of your new vehicle, and still have money left in the bank.
Matt Corke is Finder’s head of publishing ventures. Prior to this he was head of publishing for Australia, New Zealand and emerging markets. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates. See full bio
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