Car Finance Success: What To Do Now, Then & Later
Let’s recap. You’ve:
- Done your homework and decided on the perfect car for yourself, your family, or your business.
- Ensured your credit rating is as healthy as it can be.
- Negotiated a price on your dream car with the dealership.
- Secured adequate finance.
- Driven the car off the lot.
- Popped the champagne.
While it might seem like all the hard work is done, there is still the matter of the car loan and managing it successfully for the loan period. Whilst loans can often manage themselves and direct debit straight out of your bank account, it’s in your best interest to know exactly where you stand now, what things to look out for in the future and what can happen should the loan spiral out of control.
Fortunately, when a loan is managed correctly, it can be quite a painless process to pay it off completely. Successfully completing a car loan with little-to-no hiccups is also a fantastic way to improve your credit rating, which will set you up handsomely for any future loans or mortgages.
I’ve just financed a car – now what?
There are three key things to take into consideration when managing your car loan: creating a successful and realistic budget, looking into refinancing options and considering loan/debt consolidation.
Creating a successful and realistic budget
It is imperative that your car loan repayments fit into your overall budget. With your car loan, you should know exactly what your repayments will be, which will make them easier to account for. Write out all of your other monthly expenses and factor them in with your car loan. It cannot be stressed enough that you be
realistic with your budget, so that you aren’t sacrificing necessities to pay off your new car.
Consider monthly payments such as:
- Mortgage or Rent
- Vehicle upkeep (service and petrol)
- Insurance etc.
In a perfect world, you wouldn’t look at spending more than 10% of your monthly income on your car expenses. Should your car repayments fall beyond this, you’ll need to look at reducing a monthly expense elsewhere or re-evaluating your payment intervals.
As a rule of thumb, try and line up your car repayments to occur at the same time your income is entering your bank account to make the repayments as low impact as possible.
To refinance or not to refinance?
When you start driving your car and your loan begins to self-manage, a few things could happen:
- Interest rates from your lender may have dropped.
- Your credit rating may have improved.
If either of these are the case, you might consider refinancing your loan so that it has better terms and leans more in your favour. First, you need to determine whether your loan is “upside down” or “right side up”.
Upside down:Your car is depreciating faster than you’re paying it off. You can check this by finding the market value of your vehicle on RedBook.com.au and comparing it with your repayments. If you are “upside down”, it’s best to pay off your existing loan as soon as possible.
Right side up: The opposite of being upside down, where the value of the car is more than what the balance of your loan is. If your loan is “right side up”, refinancing may be a viable option for you.
Shop around and enquire with other banks or lenders to see if they will offer you a more competitive rate. Should you have existing debts with a particular bank, they may offer you a generous re-financing rate should you consolidate your loans with them.
When shopping around, be mindful of the following:
- Enquiring at too many financial institutions may reduce your credit score.
- Don’t fall for the trap in extending your loan; when refinancing, your loan period should remain the same however your repayments should be reduced, or any residual/balloon be amortised in the new loan.
- Consolidation of your loans will put your other assets at risk, not just your vehicle. Ensure you can handle consolidation payments and always consult with a financial advisor first before making any debt consolidation commitments.
How can I pay off my loan faster?
Paying off your car loan faster is certainly an enticing idea; a substantial monthly payment will be eliminated from your budget and you will be the sole owner of your vehicle. While it’s a fine idea, it can take a bit of work to get there. Here are our top three tips to pay off your car loan faster:
- 1. Consider refinancing your current loan, as mentioned above. If you’re eligible to do so, refinancing your loan may result in a lower interest rate which will allow you to pay off the sum of your loan faster. Ensure you aren’t increasing the length of your loan, but just reducing your repayments.
- 2. Making bi-weekly payments instead of monthly payments will allow you to make an extra payment per year. This will assist in both paying off your loan quicker, and reducing your overall interest as you’re decreasing your balance at a faster rate. Just be sure to check with your lender if you will incur any fees for making additional payments.
- 3. Rounding up your repayments to the nearest figure you’re comfortable with (whether it be $10, $50, $100 etc) is a great way to pay off your loan quicker, whilst reducing the overall amount of interest you’ll pay.
Note: consider payoff penalties first. Some lenders impose fees for early payoff, which may offset any savings you’d make by paying off your loan early.
You may also consider paying off your loan completely with a single payment. In order to do so, you must request a payoff quote from your lender.
The payoff quote will encompass the remainder of the principal owed on the car, any interest accrued to that point and any early exit fees the payment will incur. This payoff quote will only be valid for a fixed period of time depending on your current payment cycle, and will change as more interest is incurred and as more payments are made.
What happens if I miss a payment on my loan?
Missing payments on a car loan, or any type of loan for that matter, can often be unavoidable. If you do not meet the terms of car loan contract, this may result in a default on the car loan. Your loan contract will stipulate the terms of the default, whether they be a certain missed number of payments or failure to pay off the loan in a timely manner.
Missing a car payment will negatively impact your credit rating. Often, you will receive either a phone call or an email from your lender informing you that you have missed a payment, and you will be given a set time to resolve the issue. The longer the payment remains outstanding, the more your credit score will be negatively impacted. It can often take years to repair the damage incurred to your credit rating due to missed/late payments.
Your contract will also stipulate at what time your debt will go to collection agencies. A lender will make every attempt to contact you to resolve any payment issues, however, after a certain period of time (often 30+ days) the debt will be forwarded to a collection agency. Once your debt goes to collections, your credit rating will fall even further, and you will be subject to the pressure of collection agencies trying to collect the payments from you.
If worse comes to worst and you are not able to negotiate your debt with your lender, your vehicle can be seized depending on your loan. You will have a short window of opportunity to resolve this debt with your lender and reclaim your vehicle, however, this often involves paying off the loan balance plus any repossession fees. If this is not possible, the lender will be forced to sell your car to recover the costs of the loan. You may still be owe a balance on your loan should the re-sale value not completely cover the cost of your loan.
Defaulting on a loan can occur if you aren’t fully prepared for your new car loan. There are always steps that can be taken to avoid loan default. If you’ve already missed a payment or feel like you might miss a future one, consider the following:
- 1. Ensure you’re aware of what late fees will be incurred so that you can effectively budget for them. You may also need to review your budget to ensure you aren’t missing any future payments.
- 2. If your car loan is unaffordable, you should attempt to seek a deferment as soon as possible. A deferment will stop the threat of your credit rating suffering due to missed payments or a potential repossession. If you are granted a deferment, you should look into long-term solutions such as refinancing your loan to make it more manageable or considering trading in your vehicle for a more affordable one.
- 3. Contact your lender and ask for advice. Your lender would much prefer for you to make your payments than have to repossess your car. They may have solutions to offer you, or at the very least, helpful advice on how to proceed. Lenders are certainly willing to work with you so long as you’re truthful and genuinely want to resolve the issues with your loan.
A car loan, when managed, can be one of the simplest and most rewarding loans you’ll encounter in life. However, should they spiral out of control you should always seek help where possible to resolve the issues before they impact you negatively. For further advice or to get started on a new loan, contact Auto Car Loans on 1300 301 051 or visit our contact page to get started.