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The Ultimate Guide to Car Loans

What is a Car Loan?

A car loan, simply put, is a loan used to purchase a car.

Restricted to vehicles

A car loan is specifically only to be used for a car. When you take out a car loan, you will never see the money yourself. The funds from the loan are paid from the lender directly to the seller of the vehicle (whether it be a dealership sale or private sale).

Car loan Vs Personal Loan

The main difference between a car loan and a personal loan, is a personal loan is usually un-secured (no collateral attached) and a personal loan can be used for any purpose. Personal loans can be used for debt consolidation, going on a holiday, renovations, or any other purpose.

Lender will have encumbrance

The lender will have an encumbrance over your car until the loan is paid off in full. This means you will be unable to sell the vehicle without paying off the loan. The lender also withholds the right to repossess your car if you stop paying the loan.

New Car Loan Vs Used Car Loan

Lenders see new cars as lower risk as they will have a greater chance of recovering their loss if they have to repossess the car. Being lower risk, new car loans generally have better interest rates than used cars. Going for a cheaper used car won't always save you money. You will potentially have a higher interest rate and possibly higher maintenance costs than if you were to spend a bit more on the car and get a brand new model.

What is a residual payment and should I get one?

A residual payment, also known as a balloon payment, is a lump sum payment that is due at the end of your loan. For example, if you finance a $40,000 car with a $10,000 residual, you will only make repayments on $30,000 over the loan term and then pay $10,000 lump sum at the end of the term. The residual can be paid through several methods: you have the option of paying out with cash, refinancing the amount owing, or what a lot of people do is they will trade the car in at that point and get a new car. When you do this, the equity from the trade in value of your car, minus the balloon payment, will be rolled into the next loan. For example, if your car is valued at $15,000 for a trade in, and you have a $10,000 residual payment owing, $5,000 will go towards your next car as a deposit.

Man brainstorming reviewing car loan repayment options

Pros and Cons of a residual payment

Pros

Repayments are lower over the loan term

The main upside to a residual is the repayments for your car are lower over the loan term. If you have a fixed budget, then by utilising the balloon option you can potentially get yourself a nicer car that you might not have been able to afford otherwise.

Cons

Higher interest expense

Something that a lot of people won’t tell you, is although you don’t make any payments on your residual throughout the loan term, the residual does still accrue interest. This means that if you have 2 loans, with the same borrowed amount, the same loan term, and the same interest rate, one with a balloon and one without, the loan with a balloon will accrue much more interest over the loan term than the loan without a balloon. So although you will be getting a much nicer car with a lower repayment, you do end up paying more to do so in the long run. If you are using the car for business use however, this isn’t necessarily a disadvantage as you will potentially be entitled to claim the business use portion of your interest expense as a tax deduction. We can assist all options, but you are best to clarify with your accountant which would be best for you from a taxation and cash-flow perspective.

Advantages & Disadvantages of car loans

Advantages

Car loans are cheaper than personal loans

If you’re looking to borrow money for a car, then a car loan will get you a much lower interest rate compared with a personal loan.

Disadvantages

You can only buy a car with the money

With a personal loan, you apply for an amount of debt, the money is paid straight to you, and you can do whatever you want with that money providing you pay it back within the specified loan terms.

Flexible lending terms

With a car loan, all the choices are still yours. It’s up to you how much you borrow, how long you take out the finance for, and all of our loans provide you the option of making additional repayments to reduce your interest expense and pay out your loan early.

Car loans have a lower risk therefore lower interest

The lower risk the transaction, the lower the interest rate the lender will offer. As the lender takes an encumbrance over your vehicle, they withhold the right to repossess the car if you stop repaying the loan. This means the transaction is lower risk for the lender as they have collateral to recover the loss if things don’t go to plan.

Navigating the strict lending rules can be tricky

When you take out a car loan, there are some restrictions. All lenders have different guidelines around the age of vehicle they finance, they have different guidelines around LVR (Loan to Value Ratio. i.e. the amount of money you’re borrowing vs. the glasses guide value of the car). some will finance grey imports, some won’t, and some lenders will only finance dealer sale transactions and restrict you from financing through a private sale. All of this, combined with the fact that all lenders have a different risk appetite in terms of the types of clients they finance can make it very hard for the majority of people to know which lender has the best deal for their situation

Should I Get a Car Loan?

Taking out a loan for your next car can be advantageous for many reasons.

Young woman smiling interested in getting a car loan

Want to save money in the long term?

It will more often than not save you significant money over the life of your loan if rather than buying the cheapest car you can afford with your hard earned savings, you take out a loan for a new car with repayments that comfortably fit within your budget. You get to keep your money in the bank for emergencies, or that family holiday you're saving for, and you will significantly reduce your risk of having to pay unexpected maintenance costs .

man with a pen in hand thinking about his car

Need a car for getting from A to B?

If you are on a budget, and just need a car to get you to work each day or drop the kids off at school, quite often going for the cheapest option can end up costing you a lot more in the long run, due to their higher fuel and maintenance costs.

Want a car with low running costs?

Although there are many cars on the market that can be bought with cash quite cheaply, usually these cars are cheap because their running costs are much higher. By taking out finance for a car you might not be able to afford with cash, you could be saving yourself moneyin the long run by reducing your maintenance and fuel costs.

young mum thinking about what type of car she will need for here family

Want peace of mind?

Once you’re comfortable with your monthly repayments for your loan and comprehensive insurance (all of which we can assist you with). You can have peace of mind knowing that you won’t have unexpected expenses to keep your car on the road and keep your life running on time. We can even extend the manufacturer’s warranty for you to ensure peace of mind for an even greater period if you don’t plan on upgrading your car once the manufacturer’s warranty expires.

I can afford the car I want, why should I finance?

Car finance isn’t just beneficial for those that don’t have the cash to buy the car they want now. For example, if you are looking to purchase a car for $50,000 and you have the money in your bank to purchase it outright, if you spend all of your hard earned savings on a new car you will never see the cash again. The unfortunate thing with cars as we all know, once you drive the car out of the dealership the value drops, and will continue to drop throughout its lifetime. By spending your hard earned savings on a depreciating asset, you will never see a return on your investment. Alternatively, if you finance a car, you still have your savings with which you can invest in opportunities that will grow your capital. Although you pay interest on a car loan, the average investment will increase greater than the amount of interest you pay over the term of the loan.

man sitting with laptop thinking about saving money for car

Comparing compound interest with reducing interest

Even if you go for the safest of investment opportunities and lock your savings into a term deposit account, although interest rates on savings accounts are lower than interest rates on car loans, in the majority of circumstances you will still earn more interest on your savings than you will pay on your car loan. This is because we are comparing compound interest with reducing interest. Every time you make a payment on your car loan, you are paying interest on a lower amount. However, with a savings account, every time you earn interest, you are then earning interest on a higher amount. By financing your car as opposed to paying cash – at the end of your car loan you have your car fully paid, as well as your initial investment that you would have spent on the car, plus the capital gains the investment has experienced over the loan term.

Why Choose Credit Capital Car Loans?

At Credit Capital, we take the guess work out of the situation for you. With access to over 25 of Australia’s largest car finance lenders, and the years of industry experience our dedicated consultants bring to the table, we have the knowledge to match you to the lender best suited to your individual circumstances, and ensure you’re getting yourself the absolute best deal in every transaction. It’s not just the fact that we get the end result that sets us apart from the competition, it’s the fact that we are able to get it right first time and do it much quicker as well. To ensure you are always getting the best deal for yourself, you need to ensure your credit score remains as high as possible by minimising the amount of enquiries on your credit file.

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How are Credit Capital Car Loans Different?

Some brokers will narrow down your application to a few different lenders, apply to each one and see which one comes out best. Although this may sound like good practice, it can have a seriously negative impact on your credit score. What most people don’t know, is that every time a formal application is presented through to a lender, the enquiry will be listed on your credit file and lower your credit score. If you have several enquiries listed in a short space of time, this could lower your credit score to the same level as someone who has a collection of defaults on their credit file, making it near impossible to get you the low interest rate you truly deserve.

We protect your credit score

At Credit Capital, as we pride ourselves on building lifelong relationships with our clients, we go above and beyond to ensure that your credit score is looked after. We do all the work ourselves up front, before submitting an application to a lender, to ensure that who we apply to is 100% the best lender for your individual circumstances, and the approval is almost guaranteed.

What are the Different Types of Car Loans?

Consumer car loan

If you are an employee, as opposed to being self-employed, then you will most likely benefit from taking out a consumer car loan.

The lender pays for the car on your behalf, you have a fixed minimum monthly repayment consisting of principal and interest payments calculated on a daily reducing, fixed interest rate model.

You own the car in your own name from day one, however the lender has an encumbrance over the car until the loan is repaid.

The main benefit of a consumer car loan, is all consumer loans are governed by NCCP (National Consumer Credit Protection act). The NCCP has strict guidelines in place to protect you as a consumer.

One particularly useful one for consumers is, the heavy restrictions regarding how much a lender can charge as an early exit fee if you pay off the loan early.

Chattel Mortgage

If you’re self-employed, and purchasing a car primarily for business use, you can consider taking out a Chattel Mortgage.

It has a very similar structure to a consumer loan where the lender pays for the car on your behalf, you have a fixed minimum monthly repayment consisting of principal and interest payments, and your business owns the car from day one whilst the lender holds an encumbrance over the car until the Chattel Mortgage is repaid.

You will generally be entitled to claim the interest expense on the loan, the depreciation on the car, and all running costs as well as a tax deduction, depending on the portion of business use you’re claiming.

If your business is registered for GST, the full GST component of the car purchase is claimable as an input tax credit the your first BAS following the purchase. Most lenders also allow “low doc” loans for businesses.

As financials of a business can be quite complex in some circumstances, and a business’s performance on paper isn’t always reflective of its true performance, many commercial lenders offer loan products where no financials are required at all, providing you meet certain guidelines.

Call one of our consultants today to find out more.

How to Compare Car Loans?

Don't focus on rate

We hear it all the time. When people shop around for finance, they call up a range of brokers and finance companies and ask, “What is your rate?”

Although interest rates are an important factor when it comes to comparing loans, it is only one of many factors.

The lowest interest rate isn’t always the best deal. There are many dealerships that offer 0% finance options that prey on people who only focus on rate.

These 0% finance offers usually have very restrictive terms, but most importantly, they will usually charge you more for the car than they would if you weren’t taking the 0% finance.

The important thing when comparing is to look at the overall package. All lenders have different set up and on-going fees and different early exit fees as well.

The main thing to focus on is your bottom line. Your monthly repayment, inclusive of all fees, is the best indicator when comparing.

We compare more so you save more

At Credit Capital, with access to more than 25 of Australia’s major automotive finance lenders, we compare more so you save more.

We are independent and privately owned, so give unbiased advice when it comes to getting you the best deal.

We work for a flat service fee which is included within the set up costs of your loan, and the fee doesn’t change if we attain a higher or lower interest rate for you.

This makes it very easy for you to compare our repayment with others to see which deal is best for you.

You don’t pay anything up front, and the fee is only applied if you get a loan through us, meaning if we don’t earn your business, we don’t get paid. This makes it in our best interest to get you the best deal, every time, so we can earn your business for life.

How to Lower Interest Rates?

Rate for risk

It’s a saying you’ve probably heard so many times by now that it’s almost lost all meaning.

But when it comes to finance, the interest rate the lender applies varies based on the risk of the application.

The higher risk the application, the more likely you are to default, or the less likely the lender will be able to recover their loss if they have to repossess the car, the more the lender has to charge to offset their risk.

Lowering your risk

To lower your interest rate you need to lower your risk. There are many factors that lenders look at when calculating the risk of your application.

How long have you been in your job? Are you full time employed? Part time? or casual?

Residential history is important as well. Whether you’re renting, boarding, have a mortgage, or own your property outright, are all taken into account by the lender to calculate your risk.

Some factors you won’t have much control over, there are some things though that you can control.

How to lower risk

1. Type of car - Lenders see new cars as lower risk compared with used cars. This is due to the fact that a brand new car will hold more value, therefore the lender will have a greater chance of recovering their loss if they have to repossess the car. Also new cars generally have lower running costs, so the fact you will less likely receive unnexpected maintenance bills during the life of the loan means it is more likely you will be able to keep up with the repayments on your loan. 2. LVR (Loan to Value Ratio) - The loan to value ratio is calculated based upon the amount of money you are borrowing vs. what the lenders believe the car is worth. LVR is calculated as a percentage e.g. if LVR is 110%, that means you are borrowing 110% of what the lenders believe the car is worth. The lower the LVR, the lower risk the application is for the lender, as they will have a much greater chance of recovering their loss if they repossess the car. Factory accessories are usually taken into account when calculating LVR, however aftermarket accessories are not. If you have your heart set on a car that has been heavily customised by the previous owner, be prepared you may have to pay a higher rate as the LVR will probably be higher. 3. Deposit - By providing a deposit towards the car you can significantly lower the risk of the application. By doing this, you're not only reducing LVR, but you're also showing some commitment from your end. If you commit some of your own hard earned savings to the car, rather than just spending all of the banks money, you're demonstrating your devotion to paying for the car.

Ways to Reduce Your Monthly Repayments

Borrow less

It may sound simple, but the less you borrow, the lower your repayments will be. If you save money on the purchase of your car, or if you put deposit towards the loan, you will be reducing your repayments from day1.

Extend the loan term

Many lenders these days will allow you to finance the car up to 7 years. The longer period you extend the finance for, the lower your repayments will be. This can be a great option if you don't want the repayment to have as much of an impact on your budget, however a longer term can also mean you will pay more in interest. Speak to one of our professional consultants today to get free general advice on what might work best for you.

Residual/Balloon payment

By having a residual or balloon payment at the end of the loan, you will be making payments on a smaller amount over the life of the loan. Just make sure you plan ahead and you have certainty around how the balloon will be paid at the end of the loan.

Refinance your car

We've all been there before. Buying a car is an emotional purchase, and in the heat of the moment it can be easy to be talked into signing up and paying more than you should for something that you just need to have right now. Maybe you previously had credit issues, and now you've got things back on track you want to get out of your bad credit loan and into a good credit loan. We make refinancing easy. Talk to one of our consultants today to see how much less you could be paying on your current loan.

How to apply for a car loan

1. Find out your budget

Before approaching any lenders or searching for cars, the most important thing for you to know is how much you can afford each month for your car. This includes not just the repayment for the loan, but also your insurance and running costs for the car as well.

2. Choose what do you want

Whether you have a specific asset in mind, or just a set of requirements you needs to fulfil, everyone has different wants and needs when it comes to taking out finance. The more you can let us know about what you want or what you need, the better we are able to fulfil your dream.

3. Prepare Documentation

When it comes to taking out finance, there is no such thing as too much documentation. We will always strive to make the process as smooth as possible with the minimum amount of documentation, however, the more prepared you are, the quicker we can make the process for you. Be prepared with IDs, residential and employment histories, payslips, or tax returns and profit and loss statements if you’re self-employed. The more prepared you are the more efficient we are.

4. Speak to a Professional and apply

Once you know the above, enquire online or call us directly and we can help you with the rest. If there’s anything above you need assistance with, not to worry, our devoted team can answer all your questions and find the deal that best suits your requirements. We can guide you along the way no matter how early, or late, in the process you are. We put your mind at ease and make finding the best deal easy from start to finish.

Book a free consultation with one of our experts today!

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