The First-Time Buyer’s Guide to Car Loans
There are few purchases in life that require as much research and planning as buying a car. It can often be quite a daunting process. But understanding the full process of getting a car loan before you buy can make all the other decisions much easier!
What is the full cost of buying a car?
Being aware of the full cost of buying a car avoids unforeseen costs and gives you more leverage when negotiating. The full cost of your car can include the following:
- Deposit (this can be offset by the trade-in value of your existing vehicle)
- G.S.T. (where applicable)
- Stamp duty
- Dealership fees
- Car repayments
- Registration renewal
Understanding these costs will ensure your new car doesn’t stretch you beyond your financial limits.
Cash Purchase or Car Loan?
A cash purchase is the simplest way to buy: you find a car, you pay the owner/dealer and the car is yours. There's no hassle of applications, credit checks and bank loans. A cash purchase can also prove to be cheaper, as no interest is accrued like that of a car loan.
However, a cash purchase limits what kind of car you can purchase. It also creates a big impact on your cash flow, compared to spreading your repayments over many years. A bulk payment like this may also leave you in a precarious situation if you’ve spent all of your savings and are stung with unforeseen expenses. With risks like these, it may be a good idea to consider a car loan.
A car loan can certainly expand your choice of vehicle and help you manage your cash flow effectively. With monthly repayments you’ll be able to drive a car that you could not afford with cash. You’ll be able to select a car that you want which has all of the safety and features you require for yourself or your family. Plus, if you’re buying newer model car, you will get something that costs less to run, and (should) therefore have less breakdowns and require less parts and repairs..
What's more, the ability to pay off your new vehicle in instalments will allow you to hold on to more of your cash over time. You just need to make sure you can manage the monthly repayments.
What makes up a car loan?
With a car loan the lender loans you the money to purchase the vehicle; you pay back the money, plus interest, in instalments over an agreed period of time.
A car loan is ‘secured’ against the vehicle purchased. This means if the borrower defaults, the lender can repossess the vehicle to recoup the costs of the loan. This security allows lenders to offer lower interest rates than for unsecured personal loans and credit cards.
Five key elements make up a car loan:
1. Loan Cost
The loan cost consists of the principal and the interest. The principal is the cost of the vehicle, and the interest is the charge by the financier.
2. Interest Rate
The interest rate is the rate that is charged to the borrower over the life of the loan and is expressed as an annual percentage (per annum or p.a.).
The deposit is the cash that is paid upfront by the borrower at the time of purchase. Whilst not always a requirement, a deposit can help with reducing the overall cost of the purchase over the life of the loan.
4. Balloon Payment
A balloon, or ‘residual payment’, is an optional lump sum payment at the end of your loan which helps lower your monthly repayments. A typical balloon is 30% of the vehicle principal. That means at the end of the loan term, you can sell the car to pay off the balloon amount and get a new car. Many people decide to trade out their car and get finance on a new vehicle for similar repayments for what they had been paying previously. If you decide to keep the car, you can pay out the balloon in cash or -like most people- refinance the balloon amount and pay it off over a year or two.
5. Terms and Conditions
This refers to all the other items that make up the car loan. This can include the loan term, insurance and registration requirements, early exit fees and resale terms, conditions regarding theft or accident, as well as conditions of loan default and repossession.
What kind of car loans are there?
There are various types of car loans that are available, each of which have their own benefits. It’s often best to shop around to find a car loan that suits your needs and lifestyle.
1. Standard Car Loan
This is the simplest of loans where the lender provides finances for the borrower to purchase a car. Most borrowers using a vehicle for private use will choose a standard car loan.
2. Chattel Mortgage
In Australia a Chattel Mortgage is simply a car loan for business use. Business owners or employees using the car more than 51% for business use will typically choose a Chattel Mortgage. Chattel Mortgages attract lower interest rates than a standard car loan. Buyers are also usually able to claim the repayments expense against their income tax bill.
3. Finance Lease
The financer purchases the car and it is leased to the motorist. The motorist is provided with immediate use of the vehicle with minimal to no capital investment. These leases are available to individuals or businesses where the car is for business use. The motorist is responsible for maintenance of the vehicle on top of fixed monthly rental payments. At the end of the lease period, the motorist can decide whether they’d like to refinance the car, return it or purchase it for the residual amount.
4. Novated Lease
This is a three-way arrangement where an employer pays the financier for an employee’s car lease expenses from their pre-tax income. While Novated Leases offer tax savings, they often involve high interest rates and insurance charges. The lease companies can earn hefty commissions which are not disclosed to the employee. The higher interest rates and monthly fees can often outweigh any tax savings in a novated lease: buyers should take the time to compare the total costs of a novated lease against a standard car loan.
|You will own the car outright at the end of the loan.||You may upgrade your car every few years as per your leasing agreement.|
|You can make as many alterations or modifications to the vehicle as you’d like.||Little to no capital investment is required.|
|You can claim the car as your own asset irrespective of if you purchased the car with cash or loan.||A great option for businesses who don’t wish to have their cash tied up in a depreciating asset.|
|Some amount of capital investment at the commencement of the purchase.||May be just as, if not more expensive than buying a car after taking into consideration all associated fees and expenses.|
|Vehicles depreciate, making your investment less valuable over time.||You are unable to modify the vehicle. |
The car cannot be claimed as an asset for any financial purposes.
New vs Used Car
There is often a stigma around purchasing a used car, however it can be beneficial in reducing depreciation. Depreciation is the value a vehicle loses over time, and the more a vehicle costs initially, the more it will depreciate. Used cars also draw lower insurance rates because when a vehicle costs less, it costs less to insure. Due to the lower cost of a used car, you may also be able to move up to a luxury model due to the money you’ll be saving buying used. Whilst used cars now are a lot more reliable than they used to be, there is always a risk buying cars that are out of warranty.
On the flipside, buying a new car is easier because evaluating its condition or wear and tear isn’t a factor. This will provide for a much greater peace of mind than that of purchasing a used car. A lot more financing options are available for new cars, usually at lower interest rates which may make the overall purchase more affordable. You will also be buying into newer, more advanced technology and safety equipment with new cars.
Personal Or Business Use?
Deciding on whether or not the vehicle is to be used for home or for work can affect your purchasing decision. Car Loans for business use (typically a Chattel Mortgage) involve lower interest rates and less documentation than a standard car loan.
You may also be able to claim GST and finance repayments on your vehicle, depending on your loan type, should the vehicle be used as a business car. However you should ensure you seek advice from your accountant.
Whilst there is a lot to consider when applying for a car loan, such as the ins and outs of car loans and the different types of loans that are available, the car buying process shouldn’t be a scary one.
Buying a car should be an exciting experience, and with the proper research and due diligence, it can be!
If you’re still unsure of where to start, or require a bit more guidance, the team at Auto Car Loans are here to help. Feel free to give us a call on 1300 301 051 or reach out at any time at email@example.com.
DISCLAIMER: The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.