What are the various types of car loans available?
With so many options out there for financing a car, whether you’re buying new or used, there are products to suit all different financial situations. Here’s a look at the most popular car financing options available.
Personal loans and car loans
Personal loans and car loans are very similar loan products which are offered by banks and other lenders to finance a car. With both, you borrow a set amount of money and pay it off over a term which is generally between 1 to 7 years.
Personal loans can either be secured or un-secured. Secured loans involve you putting up an asset as security against the loan; because of the security, they generally have a lower interest rate than un-secured loans.
Loan products named a ’car loan’ will often be secured with your car as an asset. Your lender may have specific requirements that the car must meet to be put up as security against the loan, and the minimum amount that you need to borrow can be higher with a car loan.
A novated lease allows you to salary package the purchase of a new car. An agreement is made between you, your employer and a leasing company which essentially means your employer leases the car on your behalf. The lease payments, which can also cover running costs of the vehicle, are deducted from your pre-tax salary. At the end of the lease term, you either make a lump sum payment and you own the car, or you hand the car back to the leasing company and no lump sum payment is required.
As with any salary packaging arrangement, there can be tax benefits associated with a novated lease. The tax benefits will depend on your income, your use of the vehicle and the terms of your lease.
Many car dealers offer loans which can make it seem easy to drive away with the car you want today. The finance is often backed by major banks, and the terms are similar to a personal loan, however the interest rates can be higher than going directly to the bank. With dealer finance, you may have the option to reduce your regular repayments by including a balloon final payment in the finance terms.
When you’re considering dealer finance, make sure you’re aware of all the fees and inclusions, and make a comparison to what you could get through a bank to make sure you are getting the best deal.
Some car manufacturers offer finance in the form of leases and more traditional loans. Often, the interest rates offered are very low, even 0% in some cases. You need to do your homework on these offers to make sure you are getting a good deal overall. The terms of the finance varies between manufacturers, however commonly with these low interest rates, you will make regular repayments as well as a balloon payment at the end of the loan term. The attractive low interest may only apply to the regular payment portion of the loan, with the balloon payment portion attracting a higher rate – this is how offering what is perceived to be a competitive rate can be offered.
With factory finance, you should also make sure that you’re not paying a higher price for the vehicle because of the attractive finance package on offer.
A lot of mortgages offer a redraw or offset facility that allows you to withdraw money in your account which is from extra repayments you have made. With mortgage interest rates lower than personal loans and other car financing options, it can be a cost effective way to finance a car.
You do need to consider the amount of time that it will take you to pay back the money you have withdrawn from your mortgage account. If you are not going to make any extra repayments, it may cost you more than getting a personal loan as you are paying interest over a longer term. However, if you continue to make extra repayments to pay back the total amount in an amount of time similar to a personal loan term, you can come out ahead.
The best car financing option depends a lot on your own circumstances and financial position, but with so many different options available it can pay to take the time to shop around and find the right one for you.
Lend Me – Car & Home Loan Brokers – Perth, Western Australia