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If you’ve just picked out your dream car, the next step is to arrange finance. Luckily, today you have many options, and your dealership is just one of many place you can go looking for a loan. From customizable home loans to rent-to-buy deals, there are a diverse variety of finance options to explore. But first you should decide on what you want from a loan.

Loan features

When shopping around take at look at the following features of different loan products. While only a complete cost calculation will show you the real value of a loan, these separate features can help you identify those loans best suited to your needs.

Interest rate & fees

The interest rate is the first figure that most people look at, as it is often the biggest factor determining the overall cost of a loan. So, the question is how do you ensure that you get the best interest rate possible? Luckily, there are at least two things you can do to ensure that you get a good interest rate: Improve your credit score and shop around. But also, don’t forget to factor in fees when calculating the total cost of any loan.

Loan size

Some people decide on a loan amount based on how much disposable income they have, while others simply apply for the largest loan offered to them. Both approaches are a terrible way to determine how much you should borrow, as they can cause you to overreach, putting you in financial difficulty. It is crucial that you have a financial buffer in place above your disposable income for any types of loan repayments that will go off your accounts, this way ensuring that you don’t default on any payments.

Repayment period

A longer repayment period will reduce the size of your monthly payments, but it will also result in you incurring more interest. You want to be able to pay off any loan as quickly as possible. This would even apply to a mortgage where extra payment would reduce the overall cost of the loan. 

Deposit

If you decide to take out a car loan, putting down a deposit of at least 10 percent will dramatically reduce the cost of your loan, as it will bring down both your interest rate and your monthly installments. Generally, the bigger the deposit, the shorter your repayment term will be and the lower your repayment amount will be.

Ways to finance a vehicle

Now that you know what to look for in a loan, we’ll take a look at the different types of loans, and how they compare.

If you can’t pay for your chosen vehicle in full, you will have to finance your big purchase. Luckily, there are three main options available to buyers, although your access to these does depend on a few factors:

  • The age of the vehicle
  • Whether you are buying from a dealer or a private seller
  • Whether you have a mortgage
  • Your credit score

Mortgages

A mortgage is often the best way to finance a vehicle. The interest rate on your home loan is lower than that of most car loans, and by simply restructuring this existing loan you avoid all the work involved with applying for a new loan. But, remember this: the term of a loan plays a big part in determining the overall cost of a loan.

If you payback the amount borrowed for a car over 10 years (120 months), it will cost many times more what it would have cost if you had taken out a 36 month car loan with a interest rate even 5% higher. The bottom line is that if you use your home loan to pay for a vehicle purchase, you should aim to pay back the loan in under 48 months.

Pros

  • Low interest rate
  • Negates the need to apply for another loan

Cons

  • You need to actually have a mortgage

Car loan

For buyers who don’t have a mortgage, there are a few other options. The best deal for those buying from a dealer will usually be a car loan. This specialised kind of loan accepts a vehicle as collateral, which allows lenders to set a relatively low interest rate. Of course, this also means that if the buyer defaults on payments, the vehicle can be seized to recover the loan.

If you decide to apply for a car loan, expect the following features and conditions:

  • typically only given for cars younger sixty than months
  • fixed at 36, 48 or 60 months
  • can be structured to include a balloon payment
  • can involve trade-in’s to reduce the cost
  • can involve a deposit, again reducing the cost

Pros

  • Low interest rate
  • Can be taken out at dealer

Cons

  • Your vehicle can be repossessed if you default
  • Can only be used to buy late model vehicles

If you want to buy a vehicle from a private seller, there is another kind of car loan – one that involves a large deposit and higher interest rate to offset the risk associated with an older vehicle sold by a largely unknown seller. Still, this can be a good route to take if you can get a vehicle cheaper from a private seller than you would through a dealer.

Personal loan

For those who decide to buy an older vehicle, or one from a private seller, the only option is to apply for a personal loan. Because these loans are unsecured, lenders usually charge higher interest rates to compensate for the risk, but unlike a vehicle loan purchase, you own the vehicle as soon as you pay for it.

To reduce the cost of personal loan, there are two things you can do: improve your credit score, which would earn you a better interest rate, and make the loan term as short as possible. Such a tactic ensures that your loan repayment period is not longer than the usable life of your vehicle. If possible, avoid trying to pay for a used vehicle entirely with a personal loan. Rather use a loan to supplement your savings.

Pros

  • Can be used to buy an older vehicle or one sold by a private seller
  •  Won’t result in your vehicle being repossessed

Cons

  • Interest is usually higher

Learn more

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