5 things to consider when applying for car finance
Australia is experiencing huge demand for vehicles right now, and around 90% of these cars will be purchased through financing arrangements. Before borrowing, it is worth considering the following:
Depending on your circumstances, it usually makes sense to contribute as much as you comfortably can to your purchase. A bigger deposit can help secure a better interest rate, which is an important influence on how much you will ultimately repay the lender. Combining a smaller loan with a competitive interest rate will usually mean the loan is able to be paid off more quickly.
- Interest Rate
The interest rate can make a big difference on your repayment amount, so it is worth comparing. Securing the loan (often with the car itself) can also help you to negotiate a better rate. Unsecured loans (where no collateral is offered to the lender) typically attract higher interest rates.
Consider whether a variable or fixed rate best suits your situation. A variable rate will often allow you to pay down the loan faster (if you are able to pay more than the minimum), while a fixed rate gives you certainty about your repayment amount. While variable rates can go down, they can also go up, and interest rates changes can be hard to predict. With fixed rates, any market changes shouldn’t affect your repayment amount.
- Credit Score.
Know your credit score before you apply –lenders use your score to gauge their risk in lending money to you. A good score generally means the lender will have more confidence lending to you, and typically ensures a better interest rate.
However, a bad score can make it difficult to find finance or to find it at competitive rates. So keep in mind that when you finance your vehicle, it is important to pay on time and to avoid defaults, to keep your credit score attractive for future borrowing. Get a copy of your credit report for free.
- Running Costs
When estimating what you can afford to repay, it is crucial to factor in all running costs, not just petrol. It is quite common for people to underestimate these costs. Costs include registration, stamp duty, repairs, and servicing. You can find estimates of car running costs on automobile club pages such as RACQ and RACV.
- Lenders criteria
Lenders each have different terms to offer, but also different criteria of what they will and won’t finance. For example, not all lenders will loan money for older cars, and those that do may have requirements regarding pre-purchase valuation. Most lenders also have an upper limit on how much you can borrow, and some also have restrictions on certain makes and models of cars. It’s important to shop around for car finance to get the best deal.
These are just some aspects of car finance that Australians should consider when financing their next vehicle purchase.