Aside from credit and store cards, a car loan is often the first ‘big debt’ decision we make. Signing up for debt is a big step, so it’s important to understand your options and what you are committing to. If you’re considering getting your first car loan, take a moment to read on for a few handy tips.
1. Build a workable budget.
It’s important to ensure that your numbers stack up. A car loan repayment will be an extra cost coming out of your budget, so the first step is to find out what the regular repayment would be on the loan amount you’re considering. Then have a good look at your budget (living costs, entertainment etc) and take a conservative view of whether you can comfortably afford that amount.
A repayment calculator is a quick and easy way to start building a picture of what you can afford to borrow.
2. Know the total cost of your car
Remember, the cost of your car is much more than just the purchase price. You’ll also need to manage running costs like fuel, insurance and registration; and maintenance costs like services and a Warrant of Fitness.
Work out these costs upfront and then take another look at your budget. If things are starting to look a little tight, you might need to reduce the total loan amount.
3. Be smart with your car loan
Understanding how a car loan works can help you avoid unwanted surprises. Naturally, most people focus on the interest rate as the key indicator that they’re getting the right loan, but that’s not always the full picture. Here are a couple of other factors you need to consider:
Shorter is better: Where possible, try to avoid the temptation to add extra years onto your loan in order to reduce your monthly repayment. If you add up the additional cost of interest, you’ll likely find yourself motivated to opt for a faster repayment schedule (as long as it is affordable). Additional or lump sum payments could also help you pay off your loan faster.
Know all the costs; not just the interest rate: Make sure you understand all the costs associated with your car loan before you sign on the dotted line. Pricing which seems attractive upfront could hide unexpected fees or set up charges that might undermine any savings in interest. Getting the complete picture could help you make a smarter choice for the long term.
Understanding how a car loan works, especially if it is your first loan, will help you make a smart borrowing decision.