Everything You Need to Know When Choosing How to Finance Your First Car

Whether you are buying a new or used car, there are three car financing options you need to consider. These include getting a loan from a car yard, a bank, or a finance company.

Like all other types of loans, it’s important to compare interest rates, fees, benefits, and so on from different lenders. This way, you’ll know which lender you should take out a loan from. You also need to consider whether you want car yard finance, a car loan or a personal loan from a bank or finance company.

With this comparative guide to financing a car, hopefully you will be able to choose the right lender and loan for your needs.

 

Car yard finance

Car yards can either offer their own car finance or a loan from a bank, and most of them will provide this service onsite. The car finance they offer is called car yard finance.

Pros

  • Car yard finance is not as expensive as you think when you consider the total cost of other types of finance, such as a loan from a bank or finance company. It’s only a fraction more expensive, e.g.; two percentage points higher which works out to be approximately $2,000 more overall.
  • Some car yards that provide onsite financing offer lower interest rates than banks (but this means the price of the car will be higher).
  • It’s convenient as a one-stop shop, where you can get all the paperwork done at the car yard when buying a car.

Cons

  • Car-yard finance is usually more expensive than a personal loan from a credit union.
  • The finance package may include insurance (e.g.; loan protection insurance) and other extras, which you could get cheaper from a bank or finance company.
  • Car yard finance usually has high fees and commissions. You’ll need to take into account any loan establishment fees, dealership fees and monthly payment fees.

Tips

A former dealership finance manager says staff bonuses were linked to sales targets for finance and cars, and dealerships earned a cut from the lender that increased as they got more people to take out loans. Due to this, you should be able to negotiate lower rates and fees with the sales and finance managers if you visit the car yard at the end of the day, as well as at the end of the month, he adds. This is because they will be running out of time to reach their targets or that the sale could make their bonus and since it’s the end of the day, they just want to go home.

On the other hand, you could turn up at the car yard with pre-approval for the best offer loan (e.g.; a car loan from a bank or finance company) and suggest the dealer beat it.

Verdict

Car yard finance is good for tough negotiators.

 

Finance from the bank

Banks offer their own car finance. You can choose between a car loan and a personal loan.

Pros

  • You can get a car loan that has no application fee/monthly fee or has low fees.
  • You can repay the loan over a period of up to seven years.
  • Various repayment options are available, eg. weekly, fortnightly or monthly payments made via Internet banking, BPAY, direct debit, or direct payroll deductions.
  • You can add comprehensive car insurance, loan protection insurance, security shortfall insurance (GAP insurance) or a warranty to your loan, which are cheaper than those offered by car yards.
  • Car finance from a bank is easy to understand and budget for.

Cons

Interest rates can be as high as 16.4%, especially for unsecured loans.
If you pay a fixed-rate loan early, the bank will charge break costs.

Verdict

Car loans and personal loans from the bank are good for first-time car buyers.

 

Finance companies

Finance companies can either offer their own car finance or a loan from a bank or other finance company. You can pick between a car loan and a personal loan.

Pros

  • You can borrow a one-off lump sum and make regular repayments. The loan period is usually between one and seven years. If you borrow a small amount of money for a short period of time, your repayments will be lower.
  • The minimum amount you can borrow is between $1,000 and $10,000, depending on the lender. Some personal loans only allow you to borrow up to $25,000, while others are unlimited.
  • Most finance companies, such as credit unions, don’t have monthly service fees and application fees.
  • Various repayment options are available, e.g.; weekly, fortnightly or monthly payments made via Internet banking, BPAY, direct debit, or direct payroll deductions.
  • You can add comprehensive car insurance, loan protection insurance, security shortfall insurance (GAP insurance) or a warranty to your loan, which are cheaper than those offered by car yards.
  • Even with a fixed-rate loan, you have the freedom to make extra repayments during the term.
  • Residual and balloon payment options are available if you want to lower your monthly repayment costs.
  • Car finance from a finance company is simple to understand and easy to budget for.

Cons

You usually cannot redraw the money which you have repaid.
You cannot use the credit for other purchases.

Verdict

Car loans and personal loans from a finance company are also good for first-time car buyers.

 

About fixed rates and variable rates

Any type of car finance can have a fixed rate or a variable rate.

Fixed-rate loans

Fixed rates stay the same as when the loan was taken out, and they are often lower than variable rates. With a fixed-rate loan, your repayments stay the same, so it’s easier to budget for. But you may be charged additional fees if you make extra repayments and pay out the loan early.

Variable-rate loans

Variable rates move up or down at any time, and tend to be higher than fixed rates. When interest rates fall, you will love the mobility of a variable-rate loan.

 

About secured and unsecured loans

Any type of car loan can be secured or unsecured.

Secured loans

With a secured car loan, the lender has a right to repossess and sell your car in the event you default on your loan repayments. This makes secured loans less risky for the lender, so the interest rate tends to be a little lower than unsecured loans.

Secured loans are usually only available for new cars. And a secured loan for a new car often has a lower rate than a secured loan for an old car because the lender considers a used car to be riskier than a new one.

Unsecured loans

With an unsecured car loan, you don’t have to put up your car as security for the loan, making it riskier for lenders, so interest rates are usually higher than with secured loans. And since the lender has no collateral on the money borrowed, they will rely heavily on your creditworthiness.