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Tips for comparing used car loans
A car loan is a specific type of loan used for the purpose of purchasing a vehicle, such as a car, van, truck, motorcycle, or other motorized vehicles. A car loan is typically used when the borrower can not afford to purchase the vehicle with cash, but can afford to pay off a loan in monthly instalments.
Types of car loans
New car loans are for buying brand new cars (lenders will offer new used car loans for cars for up to five years old) where the interest rate is likely to be lower. A new car loan will typically use the car as an asset to secure the loan.
Used car loans are available for cars that are five year old or more. A used car loan is usually a secured loan, with the car as the asset.
Unsecured car loans are available for older cars that banks do not see of value in securing. Unsecured loan interest rates are typically higher than secured used car loans.
Pros of a car loan:
- Car loan payment terms can be up to 10 years
- Borrowers can borrow large amounts with most financial institutions
- The debt is fixed, meaning that repayment made will lower the premium and no more debt can be added
- The average interest rate for a car loan is usually lower than other loans such as personal loans or credit cards
- A fixed interest rate loan makes it easy for the borrower to plan repayments and stick to a budget
Cons of a car loan:
- Some financial institutions will place restrictions upon the makes and models of vehicles it will accept for a car loan
- Borrowers can not increase the amount of debt to cover operating or maintenance costs
- The car can be repossessed (in the case of a secured loan) or the borrower taken to court (in the case of an unsecured loan) if the repayments are not met
Who can apply for a loan?
Most permanent residents of Australia are eligible to apply for a car loan if they are 18 years or older and can verify their income. While many financial institutions will turn down the loan application of a prospective buyer with poor credit, there are some institutions willing to lend to someone with a poor credit history if the loan is secured against the value of the car.
What other types of used car loans are available?
In addition to the secured new and used used car loans and the unsecured car loan discussed above, you could compare used car loans based on features such as early repayment fees, repayment schedules and up-front fees.
A car hire purchase is another option for the prospective borrowers. Each payment made towards a car hire purchase reduces the purchase price of the car.
A car lease is yet another option for the borrower to have a vehicle for business use. In this case, the financial institution purchases the car and the borrower makes payments on it for an agreed-upon term in exchange for the use of the car.
A novated lease is the when an employer makes an arrangement to pay a lease out of the borrower’s before-tax salary. At the end of the lease period, the borrower will have the option of purchasing the car or upgrading to a new model. This is a great option to reduce your taxable income at the end of the year.
What else should you consider when you compare used car loans?
- The interest rate. Ensure that the interest rate you are offered is competitive for your financial situation and the vehicle you are purchasing.
- The loan term length. The shorter the loan, the less it will cost you in interest.
- Balloon payment. Some loans will require a larger sum payment at the end of the loan term. This is especially common with dealership lenders.
- Repayment frequency. Check to see how often you will need to make a payment and if you will be penalized for paying off the loan early.
- Fees or additional costs. Sometimes a loan with a higher interest rate with fewer hidden fees is more economical in the long run. Monthly account fees and establishment fees are common with used car loans.
- It is likely your lender will insist upon valid car insurance during the life of the loan as additional protection for the car as the security of the loan.