Are you in need of a reliable set of wheels to get from Point A to Point B? According to Finder, over 86% of Australian adults have at least one car. Though the cost of purchasing a car has largely gone down in recent years, a car purchase is still one of the biggest purchases most will make in their adult lives. That’s why it’s essential to understand your car finance options.
Your car is an investment. Aside from resale value, it’s something you’ll likely use every day that you entrust with your life as you get around town (and beyond). Aussies, on average, own their cars for 11 years and 3 months. That’s over a decade, and it just goes to show how important it is to take your purchase seriously.
In this guide, we’ll explain the different car finance options out there, as well as which one is best for your situation. Buckle up and let’s go!
How Do Australians Finance Cars?
As you likely already know, a car is a large purchase. You can expect to spend upwards of $10,000 or even upwards of $50,000 depending on the vehicle type and model. This is why it’s so common to finance a car. In fact, 13% of the population currently has an auto loan of some type.
While you can certainly pay for your car in cash (and some do), this isn’t always practical. Not only would you need a large sum to pay at once, but you aren’t able to take advantage of favourable loan terms and interest rates. Paying a couple of hundred dollars each month is definitely less of a financial hit than paying, say, $17,000 at once.
Additionally, a car loan might allow you to purchase a car in a different price range. Whether you’re seeking a new vehicle, one with top safety ratings, or an EV, financing your car purchase makes a larger price tag more manageable. However, it’s important to recognise that just because you can afford to finance an expensive car doesn’t mean it’s practical or healthy for your budget. Always weigh the pros and cons before making any large purchase.
Types of Car Loans
Now that you understand the how and why behind car loans, let’s talk loan types. In general, you’ll see these options when you begin shopping around for auto loans:
- Secured car loans: This is the most common type of auto loan. A secured loan is secured against the car you’re purchasing. This usually has the most favourable rate because the lender has your vehicle as collateral.
- Unsecured car loans: Though less common, unsecured loans offer more flexibility because they don’t require using your car as collateral. However, because they’re unsecured, expect a higher interest rate and fees.
- Financing through your dealership: Many car dealerships also offer their own financing, and this can be convenient since you can get approved right there on the auto lot. However, always make sure you fully understand the fine print before agreeing to loan terms. Some dealerships have excellent intro offers, but be mindful of a deal that looks too good to be true.
- Bank financing: Lastly, you can also get a loan (unsecured or secured) through your bank. These can be competitive, stable rates, and you’ll also know you’re dealing with a reliable financial institution that you already have a relationship with.
How to Choose the Right Type of Car Finance Option
With those loan types in mind, how do you know what’s right for you? This depends on a lot of factors, including the car cost, your credit rating, and how much you can afford to pay each month. Pay close attention to these factors:
- Loan terms: This is how long you’re expected to pay for your loan. This can be between 1 – 7 years, and a longer loan term will have lower monthly payments (but higher interest over the life of the loan).
- Interest rate: Your interest rate is how much additional you’ll pay over the borrowed amount. The better your credit history, the lower your interest rate.
- Early repayment: Many lenders also let you pay early without prepayment penalties. If you’re able to pay your car loan faster, this can result in big savings.
- Deposit: By putting a larger deposit down on your car, you finance a smaller percentage of the overall cost.
As always, ensure you’re working with a trusted lender and only sign terms you fully understand. A car loan is a large undertaking, and this isn’t something you should enter into lightly.
When in doubt, ask for help from the experts. Our team is always here to help you with your car budget, buying options, and credit rating. Contact the Debt Busters office today on 1300 368 322 to schedule a meeting with our expert team.