Setting up the right structure for your car loan is important. It can have a big impact on your ongoing budget and the overall cost of your loan. Read on for our quick guide on how to work out the right car loan term for you.
1. Be realistic about what you can afford
Building a budget is an essential step in working out what you can afford to borrow. Calculate your total income and deduct your all your costs. Remember to include the cost of running your car. The money left over is what you have available to make your loan payments.
2. Faster is always better
Technically your budget limits the size of your loan by setting the value of your repayments. But it’s always possible to borrow more money by extending the term of your loan (how long you make repayments for). It’s important to know that the more you borrow, the longer it takes you to repay your loan, and you’ll pay more in interest. It will also take longer to free up your cash to be able to spend on other things.
3. Think deposit
A deposit is a great way to buy a more expensive car without increasing your loan. Remember that any portion of the car value you can pay upfront means less interest to pay going forward.
4. Keep your interest rate down
The higher the interest rate on your car loan the more you will pay over its term. It’s important to pay off your loan as quickly as possible and that means keeping your interest rate down to reduce your costs. Focus on keeping your credit record clean by staying on top of any financial commitments. A clean credit record should allow you to negotiate the best interest rate available.
5. Review your position regularly
It’s not uncommon for financial circumstances to change. If you find you have some extra income or available cash, consider putting it on your car loan. Paying more than your scheduled repayments will allow you to reduce the principal of your loan. Reducing the principal means paying your loan off faster with less interest charged. Remember to watch out for early repayment fees which can negate any savings.
Deciding on the right car loan term for you is a matter of understanding your budget. Make sure you can afford your repayments and try to avoid extending the life of the loan just so you can buy a more expensive car.
Staying smart with a good deposit and a clean credit record can help you stay in control of your borrowing costs. Then you can keep your car loan on your radar and make the most of any early repayment opportunities going forward.
