With the majority of Australians required to take out a loan when buying a new car, the market has long offered savvy consumers means to shop around to get the best deal for themselves. With interest rates skyrocketing over the last year, that is even more important.
However, what’s often overlooked in favour of the purchase price, is the fact that the duration or ‘term’ of your car loan can have a significant impact on your ability to repay the loan. Here are three key considerations you should weigh up when choosing the term of your car loan.
Your Car Depreciates Rapidly
Most of us own everyday cars that depreciate over time. Therefore, when looking at the term of your car loan, it’s valuable to realise the longer the term is, the more it will cost you. While a shorter term will likely involve higher interest rate payments, this is offset by the ability to repay the car quicker and the reduced levels of depreciation.
By the end of the car loan, you’re left with a vehicle that is worth more than it otherwise would have been at the end of a longer term. If in doubt, remember that a vehicle can lose almost half its value within three years of being purchased.
Research Various Options
As mentioned earlier, new car buyers tend to have a habit of focusing on the interest rates associated with a car loan, sometimes at the peril of other aspects of the loan. Of course, the rate you pay will be a crucial thing in your ability to pay the loan, but this in itself plays second fiddle to the length of the loan.
What’s more, attention should be paid to the comparable interest rate, rather than the advertised one, as this provides a more accurate measurement of the burden over the length of its term.
Consider, for example, a $20,000 loan for a new vehicle, with the interest rate set at 7%. Depending on the length of the loan, you would be liable for the following repayments, each of which have different permutations for a borrower to consider.
|Loan Term||Monthly Repayment||Total Paid at end of Loan Term|
One of the key things you should take into account when obtaining finance is where you are currently at in your life and the way you live. This should also extend to the near term and any period where you might have finance. The reason for this is important as key life moments have the ability to shape your repayment abilities.
For instance, if you and your partner plan to start a family, will you still have access to two salaries? With all the costs that come with raising a child, are you likely to have enough funds left over at the end of each week to make repayments?
Employment stability and living circumstances are two other matters that can help you decide whether it’s better to get through your loan repayments sooner, or defer the loan over time while you manage cash flow to address these issues.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan