Borrowing
15 March, 2019 - 12:46 PM GMT

Vehicle finance explained

Apart from your home, a car is one of the biggest purchases you will ever make in your life. So, you want to make sure you get your finances right. YBI reports.

You might think deciding on the make, model and colour of your dream car is your most difficult decision, but ensuring you get the right finance to suit your needs is also paramount.

Unless you are savvy enough to have saved the money you need to buy your car outright then chances are you will be buying your new vehicle via some form of credit or finance. Understanding your options is the first step.  Let’s start with the basics.

Your credit score

Your credit score is determined by the information you have in your credit file. The higher your credit score the more likely a lender is to allow you to borrow funds. Your credit score will also help a lender determine the amount of money they are prepared to lend you and at what interest rate. The exact number of your credit score can differ between lenders or even between different products from the same lender, depending on the criteria used in assessing you as a potential customer. Your credit score is decided by a number of factors, including your past repayment history. Your credit score and credit history build up slowly over time.

Loan options

When purchasing a vehicle, a popular finance option is a personal loan.  A personal loan can usually be taken out over a period from one to five years and is usually offered by your bank or financial institution. A personal loan is often one of the cheapest ways to borrow money. You will have to sign a credit contract which will specify the amount borrowed and how you will repay it. Like any loan, a personal loan attracts interest which can be charged at a fixed or variable rate.  While a fixed rate loan offers the benefit of set repayments, beware of the fine print: if you want to make extra payments or pay out the loan early, you may be charged an early termination fee.

Secured or unsecured?

Like many loans, a car loan can be secured or unsecured – that is, you can offer up security (such as another asset) as an assurance you will make your loan repayments. Secured loans usually attract a lower interest rate than their unsecured counterparts. Often when buying a new vehicle, the vehicle itself is held as security.

With an unsecured loan, you don’t have to provide an asset as security. However, an unsecured loan usually comes at a higher cost and are they are traditionally more difficult to obtain as you must convince your credit provider of your credit worthiness. Interest rates are usually higher than for secured loans, since the credit provider is taking a bigger risk.

Shop around

While it may be tempting to simply go with the vehicle finance provided by the car dealership, it pays to shop around before you hit the showroom floor. By doing your homework before you buy your dream car, chances are you will be able to get the best deal. More importantly, understanding your credit options before you go to the dealership means you will have a better idea of how much you can spend. It’s also possible to get preapproval for your loan before you buy your car – streamlining the process.

Don’t forget your running costs

Of course, working out how much finance you need for your new car is just the first step. It’s important to also consider the running costs of your vehicle. These include annual fees such as registration and CTP insurance as well as comprehensive insurance (many financers will insist you have fully comprehensive insurance on your vehicle for the life of the loan). Then there are also ongoing costs to consider, such as petrol, maintenance and repairs and even tolls.

What about extras?

Sometimes your car dealer may offer you the option of taking out an extended warranty on your vehicle. Before taking up the offer be certain to check the inclusions. When will the extended warranty start? What protection does it offer? Are the benefits worth the additional cost? Remember a new vehicle will come with its own manufacturer’s warranty so ensure an extended warranty offers you over and above anything already included.

There you have it. Owning a new car can be thrilling, but don’t let your excitement override good sense. Do your homework first and opt for the deal that is right for you.