No need to feel overwhelmed when choosing a car loan; just follow our simple guide to find one that's right for you.
If you’ve started searching for a car loan, no doubt you've been faced with words like "redraw", "unsecured" or "variable rate". You could be servicing your loan for some time, so it's important to understand the different options and make the right choice. This guide takes you through how each type of loan works, and how to pick the best one for your needs.
How do car loans work?
Car loans are similar to personal loans in that you borrow a set amount of money and pay it back over time. The difference is that these loans are specifically designed to finance the purchase of a vehicle. Car loans are usually used to finance new cars and used cars
Types of car loans
There are a few options to consider when looking at car loans, and it’s important to understand the difference between them so you make the right choice.
Secured car loan. This option requires you to use your newly-purchased car as security in case you default on the loan. These loans usually come with relatively low interest rates, flexible repayment options, and with a variable rate.
Unsecured personal loan. This type of loan can be used to finance a car, or any other purchase, as the way you use the loan amount isn’t restricted. Unsecured loans generally have higher interest rates than secured loans as there is no security required.
How to choose the right car loan
Finding the right loan doesn’t have to be complicated. Follow these steps to ensure you make the best choice for your needs:
Decide how much you can afford
Make sure you don't apply for a loan with excessive fees or rates that will make it difficult for you to meet your repayments. While it may seem a good idea to make large repayments to finalise the loan sooner, you could find yourself struggling financially if these costs are too high. Sit down and work out exactly how much you can comfortably afford to put towards the loan each week or each month.
Understand your budget
Next you need to work out how you are going to budget for the repayments. If you’re self-employed or are paid at irregular intervals, you may prefer a loan that offers flexible repayment options so you can make additional payments to help you reduce the ongoing interest.
How flexible do you want your loan to be?
Flexible repayment options, means you can make additional payments and clear your loan early. You may want to use the loan amount to make other purchases if you use the car as security.
Beware of Dealer finance!
If you buy from a car yard, the dealer might offer to arrange finance for you. Dealer finance may be convenient, but there could be hidden fees and charges. For example early payout fees, monthly fees, penalties for paying more than the minimum could be part of the loan. It is important to get all the information before you sign any contract.
Did you know ?
Transport Mutual offers a wide variety of car loans for new and used cars. For more information click here