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7th January 2009
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18th June 2008
Busted: Petrol Pump Myths
19th March 2008
How to Save at the Car Wash
25th July 2007
Car loans vs. Personal loans - What's the best way to go?
28th June 2007
Car Loan Rage - What it is and how to avoid it
Hints & Tips
Make sense of it all with these Car Loan hints & tips.
Car Loans - General Information
Car Loans are quite similar to personal loans but can be used solely for the purpose of buying a new or used car. Consumers borrow a specific amount of money they need then repay the debt with interest in equal payments over an agreed term. Car loans offer the general advantages of being cheaper than the closest alternative form of lending (credit cards) and providing the discipline of a repayment schedule.
Car loans can be sourced from Banks, Building Societies, Credit Unions and other Finance companies. You can even get a car loan from the finance arm of major car manufacturers. It is usually a good idea however to shop around for your car loan before you start shopping around for the car. If you decide to finance your car purchase at the car dealership, make sure you agree on the car price before you start negotiating on the loan.
Car Loan minimum repayments
Car loans have a set repayment schedule. Many car loans however allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan as well as the overall cost. Table 1 and Chart 1 both show the effect of making regular extra repayments on a $25,000 car loan.
TABLE 1
CHART 1
Questions to ask your lender
- What is the interest rate?
- How can I qualify for a lower rate?
- Are there any application or ongoing fees?
- Is the interest rate Fixed or Variable?
- Can I get pre-approval for the loan?
- How long does pre-approval last?
- Can I make extra repayments or Lump Sum Repayments?
- Is there a penalty for paying off the loan early?
- How can I check how much I have owing?
- How can I make my repayments?
Personal loans and can either be secured or unsecured. A loan can be secured by a bill of sale or lien over an asset like a term deposit. Secured loans are usually cheaper than unsecured loans because the lender has the right to claim the asset used as security in the event that you default on the loan.
Unsecured loans on the other hand are collateral free and are therefore more expensive. Since the lender has no security in the event of a default the loan is usually perceived to be more risky.
Should you get a fixed or variable loan?
The interest rate on a personal loan can either be fixed for a specific term or variable. Both types of loans have advantages and disadvantages but both can be used to suit the preferences of different types of borrowers.
Advantages of a fixed rate
Advantages of a fixed rate
- Having a fixed rate loan guarantees that your repayments will stay the same for the fixed period.
- This means that your loan is insulated from interest rate movements by the Reserve Bank.
- Having stable repayments means you can prepare a more reliable personal budget for the long term.
- One of the drawbacks of fixing your loan is that you might have restrictions of how much extra repayments you can make. Not being able to make extra repayments means you cant pay off the debt early.
- If you wish to pay off the loan early you might have to pay an early repayment penalty.
- Fixed rate loans might be less desirable during periods of falling interest rates especially if variable rates fall below the fixed rate leaving you stuck with higher repayments.
Advantages of a variable rate
- Variable interest rate loans move with the Reserve Bank Interest rate movements. If the Reserve Bank lowers interest rates, you can expect the required repayments of your variable rate loan to decrease as well.
- Variable rate loans are more flexible and allow extra repayments. They may also allow early repayment without penalties.
- Consistenly making additional repayments will shorten the life and therefore the overall cost of the loan.
Disadvantages of a variable rate
- Variable interest rate loans move with the Reserve Bank Interest rate movements. If the Reserve Bank increases interest rates, you can expect the required repayments of your variable rate loan to increase as well.
- Not having repayments that are set for an extended period can make it difficult for borrowers to budget their repayments.