How to decide what type of car finance is right for you

Not all car finance options are the same

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You’re given a lot of decisions to make when buying a car – colour, make, model, extras. And while having more choice can be great, it can make it difficult to choose the right option.

To help you with at least one aspect of buying a car, this guide will take you through how to decide on the right type of finance.

Are you buying a new or used car?

This will affect what type of finance you can get. Lenders who offer secured car loans need vehicles to meet certain eligibility criteria because they need to be sure that they will be able to recoup their losses if you default on the loan.

This is why secured loans are able to offer lower rates.

For a secured car loan, generally you need to be purchasing a new vehicle or one that’s up to two years old. However, some lenders will allow you to purchase a used vehicle or one that’s as much as 12 years old when the loan term ends.

If your vehicle does not meet the eligibility criteria that the lender sets, for example if it is too old or not worth enough to qualify for the minimum loan amount, you may want to consider an unsecured personal loan.

How much are you looking to spend?

With a secured car loan, you will generally be restricted to borrowing as much as the purchase price of the car. For example, if the car costs $20,000 you will only be approved for $20,000.

If you’re looking to borrow more than the purchase price of the car to pay for registration, vehicle modifications or even to consolidate existing debt, you may need to consider an unsecured personal loan.

Some lenders may allow you to increase your secured car loan amount slightly above the car’s purchase price, but confirm this with the lender before you apply.

Are you buying the vehicle for business purposes?

If you are self-employed or purchasing a vehicle for business purposes, you may want to consider options outside of a traditional car loan.

For example, a chattel mortgage allows you to purchase a vehicle for business use and make regular payments to pay off what you owe.

While the financier retains a mortgage over the vehicle until you pay it off in full, there are several benefits, including tax benefits, that come with opting for this type of finance.

A car lease is another option to consider for self-employed individuals. It allows you to access a new vehicle by making regular payments to the leaser.

At the end of the lease term you can choose to purchase the vehicle by paying the balloon payment or enter into a new lease agreement.

How much can you afford?

This is one of the most important questions to ask yourself. When determining how the cost of your car will fit into your budget, don’t just include your loan repayments.

You will need to work out the running costs of your new vehicle to get an idea of how much your ongoing expenses will cost you and to ensure your budget won’t be under too much stress by purchasing the vehicle.

ASIC’s MoneySmart website has a free car running cost app that should give you a good idea of this.

How are you planning to repay your loan?

Most car loans offer repayment terms of up to five years and some extend up to seven. If you opt for a standard car loan and make all of your repayments in full, your entire loan amount will be repaid by the end of this period.

Other car finance types, such as dealership finance and car leases, may include balloon amounts that need to be paid when your loan term ends.

You need to work out what repayments you can afford and what type of repayment structure will suit you better.

As you can see, there is a lot that goes into deciding what type of finance will be the best for you.

But by comparing your options and finding a competitively priced finance option that suits your vehicle and your repayment preferences, you’ll be on the right track.

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