how-to-make-your-car-loan-more-affordable

If you are on the hunt for a new car and are looking to finance to help you achieve your new set of wheels, there are a number of factors to consider to ensure a car loan is affordable for your budget and ongoing financial position. Here we'll outline some key factors to consider before signing on the dotted line as well as some tips for comparing car loans.

What to look for in an affordable car loan?

A car loan is a long term commitment, generally lasting from one to seven years. This means the loan needs to remain affordable over its lifespan, or else you may risk losing your car if you fail to meet repayment criteria.

The first factor to consider when searching for an affordable car loan, is the amount you plan to borrow. This requires more than simply requesting an amount of money from a bank or lender - instead it boils down to a number of factors including:

  • Car make and model.
  • Income and expenses.
  • Credit rating.
  • Length of the loan.
  • Deposit amount.

Put simply, you shouldn't borrow beyond your means. This means borrowing more than you actually need has the capacity to impact how much you will pay in interest over the life of the car loan, which in some cases can be thousands of dollars extra.

Some lenders might approve you for a certain amount, but work out how that will factor into your budget. Think about how your circumstances might change over the duration of the loan; for example, whether you are likely to be promoted, change careers, purchase or sell a property or add another member to your family.

Look at factors that'll affect your income and start from your lowest estimate when you compare car loans to be on the safe side. Taking advantage of InfoChoice's car loan comparison table will help you compare around 100 individual car loan products, and help you sort through car loan offers from many different lenders. Pay particular attention to the comparison rate, as this takes into account all the various fees associated with a loan to give you a better idea of your real out of pocket expenses.

Tips to help you achieve an affordable car loan

Whether you are looking to purchase a new or used car, it's worth searching the market through InfoChoice's comparison table outlined above to find a car loan that best suits your financial needs. Below are some key tips to ensure you achieve an affordable car loan.

1. Work out how much you can comfortably borrow

For an affordable car loan, working out how much you can comfortably borrow will help determine the minimum and maximum price range of your total new or used car purchase. This can be achieved by taking advantage of InfoChoice's car loan repayment calculator to work out how much of a loan you can reasonably apply for, as well as the repayments on a car loan and the total cost in interest over the term of the loan.

It's also essential to look at your monthly income and expenses including utility bills, clothing, holiday funds, regular savings, mortgage or rent, entertainment and travel to name a few. Calculate how much income you earn each month, then deduct your expenses to help provide an insight into the maximum amount you can afford to pay on a car loan - remember it's a limit, not a target.

If you are looking to refinance an existing car loan to a more affordable option, it's also important to complete your homework before approaching a new lender. If you're prepared, it shows that you're serious, responsible and well-motivated.

2. Determine the length of the loan

It's important to work out how long you can afford to pay have a car loan in comparison with the amount you can afford to pay each month. Generally the longer the car loan, the less you will be required to make in repayments each month.

Paying less each over a longer loan term will result in you paying a greater amount of interest expenses over the course of the loan. Find the shortest term that factors-in comfortably in your budget.

3. Search for the most competitive loan within your means

In combination with sufficient income, low expenses and good credit rating, depending on how the bank or lender views your application then generally you'll be able probably be able to borrow more money and at a lower interest rate than someone with a lower credit score.

To find out your credit rating, the Australian Government's Moneysmart website outlines three credit reporting agencies where you are able to get a free credit report. These include Experian, illion and Equifax. Depending on the credit reporting agency, your score will be between zero and either 1,000 or 1,200. A higher score means the lender will consider you less risky. This could mean getting a better deal and saving money. A lower score will affect your ability to get a loan or credit.

4. Don't forget to factor in additional expenses

When considering an affordable car loan, it is important to factor in running expenses including fuel, maintenance and insurance. These additional expenses are just some associated with your new car and they could push your fairly affordable payments into uncomfortable territory.

More Australians now are opting to switch to hybrid or electric cars, given the upward increase of petrol each year. While you're less likely to find a reliable used electric car just yet, you'll be saving quite a bit on the fuel, especially if you have solar panels.

5. Secured vs unsecured

When shopping around for a car loan you may have noticed some lenders offer a secured loan, while others are unsecured. Secured means it's tied to the car, meaning if you default on your loan, your lender can repossess your car.

While this is a scary thought, if you're living within your means then you can save hundreds or thousands in interest payments by choosing secured loans as the interest rates on these types of loans are generally much lower.

Conversely, unsecured loans offer more flexibility on the type of vehicle you purchase, whether it's a classic or used car, at the expense of a higher interest rate. Secured versus unsecured is one of the biggest factors that will determine your interest rate.

6. Find a loan that allows additional repayments

Finding a loan that allows additional repayments at no extra cost can potentially cut-down hundreds or thousands in interest costs over the life of the loan. If you're having a good month or you've received a pay rise at work, you could put the extra cash into your loan and potentially shave months or years off the loan. In the same breath, also look for a lender that does not penalise you for paying off the loan early.

7. Fixed vs variable rates

Historically variable-rate car loans have featured lower interest rates. However in a rising interest rate environment, a fixed loan might provide you with more peace of mind. This means the interest rate and payments won't change for the life of the loan, allowing you to factor-in the repayments along with all of life's expenses.

How to compare affordable car loans

When you're looking for affordable car loans you need to make sure that you look at a broad range of banks and lenders to ensure you receive the best deal possible tailored to your financial position. Here's what you look at when you compare car loans:

  • Interest rate: The interest rate is what the lender will charge you for the amount you are set to borrow. By comparing interest rates across banks and lenders, you can ensure the rate you receive is competitive and relevant to your needs.
  • Fees and comparison rate: These include establishment fees and ongoing monthly or annual fees. Establishment fees can range from $100 to more than $600. Monthly account keeping fees can range from $5 to $15 per month. If you apply through a car dealership, you may also have to pay a brokerage fee. These fees are generally included in the comparison rate, indicating the true cost of the loan.
  • Loan term: Car loan terms can range from one to seven years. Shorter terms mean higher monthly repayments but will reduce how much you pay in interest. Longer terms mean lower monthly repayments but you'll be in debt for longer and pay more in interest.
  • Extra features. These can include free extra repayments and early repayments. Making extra repayments can help you pay off the loan faster, potentially saving you hundreds of dollars in future interest expenses.