Taking out a personal loan to finance the purchase of new sets of wheels is a great way to build your credit when done responsibly. It is also an excellent convenient way to improve your quality of life without having to save up the total amount you need before making a purchase.
The trick, however, is knowing how to choose the right car loan. In this guide, you will learn how car loans work and what to consider when applying for a loan.
How do car loans work?
A car loan is a personal loan that is specifically designed for a car purchase. When a lender approves your application for a car loan, you are expected to use the amount to purchase a new car.
However, some lenders may allow you to use the loan to purchase a reasonably good used car if it is less than five years old.
Types of car loans
While searching the market for the perfect car loan, you are likely going to come across several vehicle finance options.
Understanding their differences and how each one works will help you choose the product that is right for you.
Secured car loan
As the name implies, you are required to secure the loan with collateral, which is usually the newly-purchased car. If for whatever reason you default on repayments, the lender can take possession of the vehicle.
Secured loans, however, are more flexible and have lower interest rates than unsecured loans.
Unsecured loans
This type of loans is not secured. You are not required to provide any guarantee. However, you risk court actions and a black mark on your credit report if you delay or default on repayment.
Keep in mind, too, that unsecured car loans generally come with higher interest rates than secured loans.
How to choose the right car loan
Choosing the right car loan can be overwhelming, especially if it is your first time doing so. There are so many financial aspects to consider.
Decide how much you can afford in repayment every month
Before doing anything, even setting a budget, you need to understand your financial circumstance. You need to have a firm grasp of how taking out the car loan would impact your ability to repay previous loans, if you are servicing any.
Work out the exact amount you can afford to pay every month on the car loan without falling short on other responsibilities. Can you provide an extra $270 mandatory monthly expense on your current income?
Set your budget
Once you are clear on the amount you can afford to pay each month towards repaying the loan, the next thing is to set your budget.
Shop for the best deals
Most Australians are more likely to take out a loan from a financial institution like a bank that they are connected with than going to a new bank.
Be sure to check out other lenders; Remember, your goal is to get the best deal.
Play the market, visit other lenders’ websites to see their interest rates or use rate comparison tools to find the best deals.
Consider the loan term
A shorter loan term means you pay a more substantial amount each month. Can you afford that? The upside, however, is that you can pay off the debt faster while paying smaller interest on the loan.
On the other hand, opting for a longer loan term means you only get to pay smaller amounts on loan each month. However, since you will be carrying the loan much longer, you also have a higher interest to pay.
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