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Finance Choices


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Financing and insurance go hand in hand. It is MOST important you get this right.

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Insurance Information

Loans

When comparing loans you need to have a good understanding of the terms used in loan contracts. Here is a list of terms commonly used in contracts.

Principal The amount you borrow.
 
Term The length of the loan. Car loans commonly range from 12 months to 60 months (1 year to 5 years). The shorter the loan the larger the repayments will be.
 
Interest The charge from the lender for using its money. This is usually expressed as a yearly rate and called the annual percentage rate.
 
Fixed Interest Rate

This means the rate will remain the same for a set amount of time. This offers greater control over your finances because the repayment amount will always be the same for the fixed interest period.

The fixed interest rate and the time period it applies to must be stipulated in the credit contract. Generally you will not be able to make more than the agreed repayments (i.e. pay the loan off more quickly). Check the contract for any conditions that apply.
 

Variable Interest Rate

This means the rate will move up and down depending on the market.

This can (and does) affect your repayment amounts depending on which way the interest rate moves. If the interest rate moves up, your repayments will go up, if the rate moves down, your repayments will go down.
 

Split Interest Rate

You may be able to choose to split the type of interest rate that applies to a loan. This can occur in two ways.

The first being a fixed interest rate for a set amount of time, and after that time elapses, the rate can be changed to a variable interest rate.

The second being that part of the amount borrowed has a fixed interest rate applied, and the remaining amount has a variable interest rate applied.
 

The total amount you pay to the lender will depend on the amount you borrow, the interest rate charged and the term of the loan.

Lenders will usually calculate interest charges on a daily basis. Multiplying the debt that you owe each day by the daily interest rate calculates the interest. These interest charges are usually added to your loan account each month.
 

Types of Loans

When financing your next car purchase, there are several different finance arrangements you can use to go about it.

Dealer Finance

An often convenient and simple solution to finance when buying a car through a car yard, this convenience can have several down sides.

Dealer finance will generally have a higher interest rate than competing finance options from other lenders, as well as often having large fees if you pay the loan out early.
 

Secured Personal Loan

Secured loans have an advantage in that you will generally benefit from lower interest rates and can often borrow a larger amount.

Disadvantages of a secured loan are that the car you are borrowing the money for is often the security on the loan, so if you don't make the repayments they can take the car from you.

Lenders may have more stringent minimum insurance requirements for the car, which often is Full Comprehensive insurance.
 

Unsecured Personal Loan

Unsecured personal loans have the advantage in that they are simpler to arrange than secured personal loans. All that needs to be confirmed is that you are able to make the repayments and that you are not a credit risk.

Disadvantages are that you are charged higher interest rates than secured loans, the amount you can borrow for a car will be less, and if you suddenly have trouble making the repayments and default on the loan, you can end up losing the car anyway and could possibly be forced to file for bankruptcy.

You generally do not have to get the same level of insurance as required by a secured personal loan or a car loan, however if you crash the car you'll be making payments for something you no longer have if you don't have insurance.
 

Car Loan Car Loans offered by banks are generally only available for relatively new cars. Like a secured personal loan, the car is often the security for the loan, and you are generally required to get Full Comprehensive Insurance for the vehicle.
 
Hire Purchase

Hire Purchases are structured similarly to a Secured Personal Loan/Car Loan, but are targetted mainly at businesses. As it is secured finance, it allows lower interest rates.

Advantages of a Hire Purchase loan are that if the vehicle is used for business purposes you are able to claim GST and Input Tax Credits.

Typically at the end of a Hire Purchase loan there is a Balloon payment to be made to pay out the residual value of the vehicle after depreciation.
 

Home Equity Loan

If you're currently paying off a mortgage, there is the possibility to use the equity in the home to get finance for a car.

This has the advantage of all your repayments for both house and car being one, so you only have to budget for the repayments on the one loan instead of having to make repayments on both the car and the house each month.
 

Leasing

Leasing is another type of finance that may suit people who regularly trade-in their car. In a lease arrangement where there is no obligation to buy the car, the ownership stays with the lender and the car is returned at the end of the lease term.

During the term of the lease you are responsible for making the lease repayments and for the cars running and maintenance costs. Repayments for the lease are based on the difference between the cars sale price and what it is estimated to be worth at the end of the lease.

There can be benefits associated with tax and GST if the car is for business use.

After the lease period expires you often have the option to buy the car for its residual value, much like in a Hire Purchase loan.
 

Balloon Repayments

An increasingly popular method of financing car purchases is a Balloon Loan. You pay reduced monthly installments for the term of the loan, with a large final payment ("Balloon Payment") that clears the debt.

Consumers will have a number of options available in dealing with the balloon payment, namely paying the full amount, re-financing or rolling over into another credit product.

Some companies, such as car dealerships, may provide balloon loans that offer a guaranteed buy-back price on your vehicle. Consumers should make sure they are aware of the conditions attached to these arrangements.

Consumer leases are often provided in the form of a balloon loan.
 

Varying the credit contract

If you find you have problems repaying your loan the law allows for a variation in a credit contract on the basis of hardship, but the following circumstances must exist:

  • your inability to make repayments must be due to unemployment or illness or some other reasonable cause you expect that you will be able to make repayments if they are altered
  • the situation is only temporary and it should improve in the near future.

You should first contact the lender and try to come to an arrangement to vary the loan contract with them. If you reach an agreement the lender must give you written confirmation of the terms. This could involve reducing the repayments and extending the term of the loan or postponing repayments for a period of time or a combination of both.

If you are having difficulties coming to an arrangement with the lender you can get help from the Office of Fair Trading or a financial counsellor.
 

The contract and deposit

If you sign anything at a car dealership, it is probably a sale contract. Contracts are legally enforceable. Make sure you read what you are signing. Read all documents carefully and do not sign anything unless you understand what you are agreeing to, and you are certain you will be buying the car.

It is common practice for dealers to take a holding deposit for the car when you sign a contract. Always get a receipt for this money. If you have decided to buy a car but you need to have a loan approved first, then have written into the contract. If you have this specified in the contract and you cannot get a loan after reasonable attempts, you may be able to cancel the contract and have the deposit returned to you. 


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