Not All Loans Are Created Equal

If you’re new to the world of car loans and personal finance  perhaps because this is the first car that you’ve bought for yourself  then you might be fooled into thinking that all loans are created equal and it doesn’t matter which finance company you go with. This is one of the reasons why this company exists  we’re here to help people like you work out what they need and get the best deal out there. Because not all loans are created equal.

The most obvious thing about a loan is the amount you’re borrowing  known as the principal. This is the sale price of the car, usually with a processing fee on top of that. You will probably have to put a deposit (an initial payment) on the car. The bigger the deposit, the less you have to borrow. And the less you borrow, the less you’ll end up paying in interest.

The first place where most car loans differ is in the area of interest rates. In general, the lower the interest rate, the less you’ll pay in the long run  although loans with a low interest rate tend to be for a longer term so the loan company will maximize the amount of interest they end up collecting off you. Remember calculating compound interest during maths class in high school? Compound interest isn’t just a fancy idea dreamed up by maths teachers to torment you. It’s what they use on most loans. Interest rates can be fixed (always the same), floating (going up and down) or capped (going up and down but never over a certain limit).

The term, mentioned in the previous paragraph, is the amount of time it will take you to pay the loan off. Although everybody’s situation is unique, it’s wisest to choose a term that will be shorter than the amount of time that you plan on owning the car. It’s harder to resell the car if you still owe money on it (in fact, this is one of the things that second-hand car buyers need to look out for). You don’t want to keep paying off a car you no longer own. The loan company will get rather snippy if you do sell it, as they have some rights to that vehicle until the loan is paid off and you own it outright.

You also have the repayment amount to workout. Repayments can usually be done monthly or fortnightly, usually by an automatic payment from your bank account. The amount you have to repay per fortnight or month is tied up with the interest rate, the principal and the loan term. Finance advisors tend to recommend that you go for fortnightly payments rather than monthly ones, as you end up paying back more of the loan in a year (assuming that the loan term is for more than a year, which it usually will be) this way. There are 26 fortnights in a year but only 12 calendar month, and the more interest you can slice off, the better it is for you.

Some loans allow you to make lump sum repayments on top of your usual regular repayments. Some don’t. Some charge an extra fee if you pay the loan off earlier than the due date. This is something that you need to bear in mind when you take out a loan. If you do end up with a bit of a surplus in your bank account, it can be more financial sense to pay a loan off (and reduce the amount of interest you have to pay) than to put it in a savings account (where you will earn some interest but not as much as what you have to pay).

If you have any other questions about loans and borrowing, then please ask us. It’s what we’re here for and we won’t think you’re thick if you ask.

Avoiding Financial Meltdown Over Christmas

It’s only a month out from Christmas, and there is probably some justification for hearing carols and seeing decorations around in the shops. The advertisers are out to get you, touting the latest must-have and pressuring you to buy this that and the other thing to buy, buy, buy for the kids, your wife/husband/partner, your parents, your siblings, Aunty Sally, the cat, old Uncle Tom Cobbleigh and all.

It can be very hard to resist the siren call of the advertisers. However, if you’re either considering taking out a loan for a new car or if you already have committed yourself to a car loan, you have to be really canny in order to resist the pressure and keep on top of things. January can be really hard for some people as the credit card bills come home to roost or when there’s not as much money in the bank account to cover the repayments for the car. Even if you are one of those lucky people who has got a car through a novated lease agreement, the whole commercialised Christmas thing can be a drain and a pain.

But you don’t have to turn into Scrooge and write the whole season off as a lot of humbug. You can enjoy the fun of Christmas and buying treats for people you care about  without blowing the budget. Your role model from Charles Dickens’s short story should instead be the Cratchett family  cheap and cheerful.

However, this sort of thing often has to be planned in advance, especially if you’re going to try to save a few pennies here and there. So as there’s a month to do, here are some ideas:

  • Everybody who will be at your Christmas celebration on the day itself has to buy one present for one other person. Pull names out of a hat to work out who buys for whom, and set a maximum dollar limit on the value of the gifts. It’s amazing what you can pick up for $10 if you look.
  • Buy gift cards for your nearest and dearest, then hit the shops during the New Year and Boxing Day sales when everything drops in price.
  • Do a little DIY and make gifts for family members. Things that work well in this category include edibles and growables, plus a few cosmetic thingies. Edibles include chocolates, biscuits, cakes, jam and home brew wine if you’ve been really organised. Growables include any pot plants and veggies (and right now is a good time to get seedlings going ready for the day). Cosmetic things include bath salts, bath bombs and herbal vinegar toner. Plenty of how-tos are available online or in the local library. Even more organised people can try their hands at other handcrafts.
  • Also make your own Christmas cards. A bit of coloured paper, a few magazines or other things you can cut pictures out from, the odd bit of glitter and away you go!
  • Give vouchers or coupons for services that family members can redeem during the year. These can include babysitting, washing the car, mowing lawns, makeovers and (for appropriate people, of course!) something X-rated.

It can be tough to resist the pressure and to refuse to buy into the massive overspending culture that surrounds this season. It’s easy to be guilt-tripped into buying more than we can afford and blowing the budget, but it’s just not worth it. Keep your eyes fixed on what’s important and on real happiness  and that can’t be bought. You can’t even take out a loan for it.

Loan Repayment Insurance

These days, a number of loan companies and banks make taking out loan repayment insurance a must when you take out a loan with them to purchase a vehicle. I remember the first time I came across one of these things. I started wondering what the heck they were and why on earth I had to get this policy  and the more cynical part saw this as yet another money-making scheme on the part of the lenders.

The idea behind loan repayment insurance works more or less like this: if something happens to you that means that you can’t meet the loan payments, the insurance will cover the payments for you. And these things do happen. People lose their jobs, have accidents, get sick and die (the latter tends to saddle the surviving significant other with the debt, especially in the case of joint ownership). Now, if you’re already up to the neck in debt  mortgages, other hire purchase agreements and credit card debt  this can be a handy thing to have up your sleeve, as it means that the repo people aren’t likely to turn up and take your car away.

On the other hand, if you’re more of a frugal type who usually avoids debt as much as possible and is pretty good at budgeting so you meet your commitments, it can be more of a nuisance. Not only do you have to pay back the loan and the interest but you also have to pay the insurance premium and sometimes this premium is included in the principal amount borrowed so you have to pay interest on that as well.

As always, you need to read the fine print very carefully before signing anything, and that includes a loan repayment insurance policy. For example, if you aren’t currently in paid work or if you are self-employed, you won’t need redundancy cover (self-employed people can’t fire themselves).

However, as mentioned earlier, they are often compulsory and in the case of some lending institutions, you can’t get a car loan without one. They can even get a bit sneakier, calling the policy lifestyle protection insurance and guaranteeing to keep up your current level of income even once you’ve finished paying off the loan (this was the case with the one I was involved in). Politeness kept me from unleashing my inner Scrooge in fury at the slick, smarmy salesperson and letting him know that I lived by the policy of cutting my coat according to my cloth and knowing that you can’t expect champagne on a beer budget.

In the end, I got out of that nuisance policy by paying off the loan as quickly as possible (I had chosen a loan that allowed me to make lump sum repayments and pay the loan off early to minimise the interest we paid) and then cancelling the damn policy. It’s something that I recommend doing. You could also try the following if you don’t like the idea of this insurance:

  • Hunt around to find a lender who doesn’t have this requirement (let us know about this and we’ll do the hard work for you).
  • Amassing as large a deposit as possible to minimise the amount you borrow and thus the amount you repay  and also the size of the weekly payments.

You may, of course, be in a situation that makes this sort of insurance attractive. In this case, don’t forget to ask as many questions as possible, even if you feel stupid asking them.

Got The Loan? What Comes Next?

It won’t be long, hopefully, until you have managed to find the financing package that suits you and your lifestyle best so you can get that set of wheels. It could be a personal loan or it could even be a novated lease system. But once you have got the car sitting in your garage and a debt to pay off, what come next?

Obviously, you’re going to pay the loan off. The weekly, fortnightly or monthly repayments are the standard way to do this, and this is something you need to talk about to us when you go about taking out a loan. These payments should be something that you can manage without too much of a squeeze. And if theyre monthly payments and you get paid monthly, its wise to schedule the date the payment goes through for the time of the month when the bank balance is looking a bit healthier rather than the skinnier end of the month. Otherwise, it’s baked beans time.

The sooner you can pay a loan off, the better, as this reduces the amount of interest that you end up paying. Some loans have a small penalty fee if you pay the loan off earlier to discourage you from doing this, but if you sit down for a bit with a calculator, you usually find out that this penalty fee is less than what you would have paid in interest anyway. Or do your homework beforehand and look for a loan that allows you to make large lump sum repayments or pay the lot off early.

Here are a handful of ideas to help you find a way to pay your car loan off earlier than the full term of the loan:

  • Make a tight temporary budget and see if you can cut a few corners off your other expenditure here and there so you can increase the amount of your repayments. Maybe you can postpone a holiday (or have a staycation checking out the attractions in your local area while you stay in your own house). Maybe you can have a temporary ban on retail therapy. Maybe you can buy clothes from second-hand shops. Maybe you can cook cheaper cuts of meat. Maybe you could Every bit you do to increase your regular payments will see that loan being paid off faster. You could even do this before you take out the loan, avoiding penalty fees.
  • Got a bit of surplus? Instead of blowing it on a shopping spree or putting it into a savings account, use the amount to pay a bit more of the loan off. The amount of interest you would have earned by putting it in the savings account is probably less than the interest you’ll not pay by whacking that loan down. A penny saved is a penny earned, and they can’t tax you on it, either.
  • Stay informed. Don’t just leave the loan amount sitting there and ignore it, apart from making the funds are there to meet the latest automatic payment. Know how much there is left to pay  it might be something that you can manage to pay off outright.

If you’re on the lookout for a new car and have seen an ad or an example of a machine you like, then you probably want to take out a personal car loan to buy one. However, when you’re in the process of shopping around, you may have noticed that not all cars with the same name are equal, and some are cheaper than others. What’s going on?

What’s going on is that manufacturers often make different variants within a model. This is a way of increasing their sales potential. Usually, there are three main variants. Here, we’re not talking about sedan versus station wagon variants, or short wheelbase versus long wheelbase, although this is another way that manufacturers create more variants and increase their market share. Equally common is the trend of having three variants with different levels of luxury.Usually, the differences are indicated by a set of letters and/or numbers or even a subspecies name attached onto the main name.

You have to be a wee bit informed to know which one is the luxury version and which one is the basic version (if basic is a word that you can actually use about new cars these days). Most of the differences are inside either under the bonnet or in the interior. Occasionally, the luxury variant has some exterior touches that make it look a bit different from the others. If you’re unsure, then have a look at the manufacturer’s website or brochures, or visit a good car review website like Private Fleet, which will let you know.

Now, if you are on the hunt for a new car, the difference between the variants usually means a difference in price. This means that if the weekly repayments for the high-end variant are beyond you, you may be able to afford the weekly repayments for the cheaper version, putting the make and model of car you like within your reach.

So what sorts of things usually make the difference between basic and luxury variants? Here are a handful of differences that you can expect:

  • The interior trim. The basic variants usually have a cloth finish while the luxury ones get leather or a better type of cloth.
  • Bells and whistles: The luxury ones usually have a few more gadgets and conveniences (e.g. electrically adjustable mirrors, cruise control, voice control) that the basic ones don’t. This is the biggie, and this is the main way that the luxury and the basic variants differ.
  • Sound system: While the basic model will have a sound system, it won’t have as many speakers or as powerful speakers as the posher version.
  • Engine: Often, the more powerful engine is only available in the luxury variant. The good news here is that the basic versions are often more frugal.

It’s slowly phasing out, but some marques have differences in the safety features as a way of making the basic model cheaper than the luxury version. This isn’t to say that the basic variants are unsafe but they can have fewer airbags and fewer active safety features. Do your homework. If safety is important to you and the luxury variant has the better safety level, you might have to scrimp and pinch a little more to save up the deposit for that one or to manage the weekly payments. And shop around for loans  you might be able to find one that you can manage, so talk to us.