Buying a car is a major expense — your car is probably one of the most expensive items you own. However, for many of us, it’s an unavoidable investment. The vast majority of Australian households own a car, and more than half own two cars.
How can you afford a car more easily? One common choice here is to apply for a car loan, which allows you to manage the cost of your vehicle much more easily by spreading the payments out over time. In this article, we’ll explore what a car loan is, why you might consider one, and how to get one.
What Is A Car Loan?
A car loan involves borrowing money from a lender to buy a car. You can then purchase the vehicle and repay your lender in pre-agreed installments over time. You’ll also pay additional costs like fees and any interest on the loan.
Car loans are different from dealer finance, where the lender pays the dealer directly.
Why Get A Car Loan?
There are several good reasons why you might consider applying for a car loan, such as:
- If you can’t afford the lump sum payment to buy the car you want upfront, a loan can allow you to pay in a more affordable way
- The monthly payment structure of a car loan can make it easier to budget, as it’s a predictable expense that is easy to work around
- You’ll own the car from the very beginning of the loan period (unlike with dealer financing) and at the end of the loan period it’s yours to keep
How Do Car Loans Work?
So how do car loans actually work? The first step is to meet with a lender and apply for a loan. Once approved, you’ll pay a monthly payment to the lender, including any additional interest on the amount you owe.
Factors Affecting Your Monthly Car Loan Payment
There are several factors that play into how much money you will pay per month:
- The total amount of your loan
- The interest on your loan. Interest rates are usually a little higher for used car loans.
- The length of your loan term. Longer-term loans will mean lower monthly payments, but you’ll end up paying more in interest.
In many cases, you’ll be able to trade in an existing vehicle to lower the amount you need to borrow. It’s also typical to make a down payment in cash which will result in you needing to borrow less.
Important Terms To Be Aware Of
There are several key terms you should get familiar with before applying for your car loan. Here are some of the most important:
- APR (Annual Percentage Rate) — this refers to the interest rate you pay on your loan, as a percentage of the total loan amount, including fees.
- Simple interest rate — the interest rate of your loan, not including any fees or discounts that happen over time.
- Principal — the amount of money you borrow, not including interest.
- Down payment — the sum you pay upfront at the start of the loan, which is subtracted from the total price of the car to show the amount you need to borrow
- Total car cost — the entire amount you will pay to own your car, including the down payment and all your repayments including fees and interest
How To Get The Best Deal On A Car Loan
There are many things you can do to get more favourable interest rates on your car loan and boost your chances of getting accepted. These include:
- Cultivate as high a credit score as possible
- Try to get a sizeable down payment ready, so you can afford to borrow less
- Work with a good broker. The right broker can help you find the best lender for your needs, work out the best possible terms for your loan, and make sure you avoid any pitfalls or unexpected challenges.
How Lynam Home Loans Can Help
At Lynam Home Loans, we have many years of experience helping people find the right loan for them, and this includes many car loans. We can help you find the best lender for you, and guide you through the process of applying for a loan so you get the best possible deal. Contact us to learn more.
