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.