The world of car finance can be a hugely confusing place to anyone not sporting an economics degree (or the surname Koch).
For a start, it’s like they’re all speaking some strange and alien language, with terms like comparison rate, principal, redraw and payment schedules all thrown about while we normal, non-finance folk smile politely and get more and more confused.
Plus, there are more ways to borrow money than ever before, from personal debt to secured loans and even low-rate credit cards, so it’s near impossible to know at a glance which option is best for you.
Is the lowest rate always best?
The easiest and most obvious choice, of course, is to pick the deal that offers the lowest interest rate (meaning you’ll pay the least amount of interest over the duration of the loan), but hard though it might be to believe, that’s not always the best option.
Because when it comes to car finance, the devil is in the detail. And while a rock-bottom rate is obviously appealing, most experts agree that flexibility is priceless in the car-loan process.
“If you’re in the market for a car loan, interest rates are just one component – and they are important – but equally important are the fees. They can have as much of an impact on the total cost of a loan as the interest rate,” says Mitch Watson, a research manager at financial comparison website Canstar.
We spend so much time researching the vehicle we want to buy, but almost no time researching the finance options to compliment that purchase.
“In addition to that, people do pay off car loans sooner than they think, so you do need to make sure a loan has flexible terms, and that you can repay it early without penalty.
“The secret is research. We spend so much time researching the vehicle we want to buy, but almost no time researching the finance options to compliment that purchase.”
The ability to repay a loan early, rather than stay locked into a fixed-term contract, could save you thousands in interest repayments, even if the interest rate is slightly higher.
Likewise, the ability to make extra repayments as and when you can afford to can both reduce the length of the loan and lower the amount you’ll pay in interest.
But those are just the financial perks, and there are plenty of convenience features to look out for, too. And in much the same the way that the home-loan market is no longer the exclusive domain of the big banks, there are now a huge variety of lenders for smaller automotive loans, too. And not just for new cars, with plenty of finance deals on offer for used cars as well.
What to look for
So, what should you be looking out for? For a start, you should be able decide on the length of your loan, rather than have someone else decide it for you.
Remember, the longer the loan period, the more you pay in interest (which is why credit-card companies would prefer you to only make the minimum repayment, and why 30-year home loans are so financially painful). So, if you can afford to pay a loan off sooner by making bigger repayments, you probably should.
The NRMA, for example, offers new and used vehicle finance (along with vehicle inspections, used car checklists and Car History reports that will tell you if your dream car is actually a hidden nightmare) that span between one and seven years.
There other, less obvious, but super important, features to look out for, too.
So, if you were to buy a $20,000 car and take a three-year loan, then at current interest rates, your monthly repayment would be $617, and you would pay a total $22,228 over the life of the loan. Take that same loan over seven years, and your monthly repayment drops to a more manageable $301, but you will pay a total $25,347 over that seven-year period.
It’s here where flexibility matters, because a loan that allows you to pay it out early by making extra repayments means you can take a longer, seven-year loan period – so you’re only obligated to make the smaller monthly repayments – but can still pay it off in three years (or less, should you win the lottery or find yourself bequeathed a fortune by a distant royal relative), saving a lot of money in interest.
Check the details
And there other, less obvious, but super important, features to look out for, too. What good is a rock-bottom interest rate, for example, if your savings are eaten up by an annual fee?
Likewise, if you’ve spent months searching for the perfect car, you don’t want it to be snapped up by someone else while you’re waiting for your loan to be approved.
There are loan providers who don’t charge establishment or annual fees, and can offer pre-approval in as little as five business hours.
But there’s no need to rush into a loan agreement without at least weighing up your options, and no obligation to stick with your bank or current provider if there are better options out there. It pays – quite literally – to shop around.
Because when it comes to car finance, not all loans are created equal.