Is your ride getting you down? Feeling like an upgrade but don’t want to deplete your savings account? Car finance could be the answer. There are several reasons why taking out a car loan can be a good idea:

Maybe you need a new car but need the cash for an investment or down payment on a house.
Perhaps you want to build your credit score, so you can eventually get the best terms the lending industry has to offer.
Or maybe you’re simply a little strapped for cash and need to break up the payments.
No matter your reasons, it’s important to always do your research on what type of loan will best suit your circumstances and shop around for the best deal. In order to help you on your car-buying journey we’ve put everything you need to know about car finance in one nifty location. So, let’s jump into it!

Secured vs unsecured loans

All types of loans are either secured or unsecured, and car finance is no exception. A secured loan uses the asset being purchased, in this case the car, as security for the loan. If the borrower can’t repay the loan, the lender can reclaim the asset to cover the costs. Although if the sale of the asset doesn’t cover the full amount owing, the borrower must pay the difference.

The benefit of a secured loan is that the interest rates are usually lower and fixed, which means the repayment amounts remain the same. This is because the risk to the lender is lower.

In an unsecured loan, as the name suggests, the lender does not use any assets as security. As this carries more risk, they usually charge higher interest rates. These types of loans are not generally for cars, because you can usually save money buy using the vehicle as security. Some situations that an unsecured loan might be useful for a car, is if the car being purchased is not an acceptable asset for that specific lender, if the asset is too old or even if you wish to borrow more than the actual purchase price by a substantial amount to cover costs or customisations to the car.

Used vs new car finance

Beyond secured and unsecured loans, finance options vary depending on whether you’re buying a new or a used car. Getting finance for a new car is usually more affordable as interest rates tend to be cheaper. Many lenders won’t offer secured loans for used cars more than 15 to 25 years old, meaning if you don’t use an expert with a large panel of lenders you may be left with an unsecured loan which will attract higher interest rates.

Car loan tenure

The length of your car loan affects both the repayment amount and the interest rate, making it an important aspect to consider when taking out car finance. As a rule of thumb, the longer your loan period, the smaller the repayment amounts but the more total interest you pay and compare car loans.

With this in mind, it’s important to choose a loan agreement that is affordable and allows you to comfortably make your repayments whilst minimising the interest. It’s also important to be aware of any fees or charges for paying out your loan before the agreed period, as this can blow out your costs.

Major lenders, private lenders, and car dealerships

When it comes to which lender to choose, you’re spoilt for choice. Banks, non-bank lenders and private lenders generally offer secured loans, and their rates can vary from being competitive to very expensive. Car dealers also offer finance. With all these options there are pros and cons, which you can read more about at loanoptions.ai.

1. Down payments – While you don’t want to pay off your new car immediately (otherwise you wouldn’t be reading this paper), the bigger the initial down payment the lower your repayments and interest will be over time. Although the amount can vary depending on your income, cash flow and monthly expenses, putting down at least some deposit can also help secure you a lower rate with certain lenders.
2. Balloon payments – Some car loans offer balloon payments or residual payments. This means you pay off part of the loan with smaller regular repayments followed by a final large lump sum (this is the balloon bit). Whilst this may look like a good option, as it reduces the monthly repayments, you’ll have to pay interest on the balloon amount, bringing up the total amount repayable of the loan.
3. Interest rates –  We’ve already talked a lot about interest rates and all the things that can affect them. The best thing to remember is to research, research, research! Shop around to make sure you’re getting the best deal and tailor your loan agreement so that the repayment levels and interest rates suit your circumstances.
4. Refinance  – Refinancing a car loan means revisiting an existing car loan to test if there are any new offers that are more competitive and can save you money. This is an attractive option for those that feel they might not be on the best interest rate, or maybe the repayments are a little too high. It is also an opportunity to revisit the correct loan term to be selected and any other ideal features you wish to have on the loan.
5. Fees –It’s important to look at the fine print when applying for car finance, especially any associated fees. Ask yourself these questions:

• Are there any entry or exit fees?
• What are the late repayment fees?
• Are there fees for paying your loan off early?
• Are there any other added costs that could come up?
• Shop around to see which deals offer the lowest fees.

Insurance

We can’t stress this enough; you MUST insure your car, as this is a mandatory requirement for a secured loan. The lender will not provide funds or settle the loan without confirmation that the car they are lending money against is protected by an insurance policy (comprehensive insurance, not third party). When you take out car insurance, market value isn’t always enough, so try to find comprehensive insurance that offers agreed value, because in some instances, the loan balance may reduce SLOWER than the value of the car. This can create a risk of there being a shortfall if something went wrong.