Arranging finance
Most people will turn to car finance at some point
in their lives as car owners. Cars are expensive, and raising the
necessary cash to pay for one outright is often not a possibility -
particularly for first-time owners.
Borrowing money is a big commitment, and can be a terrible drain
if you don't think it through; make sure you understand exactly
what’s involved before rushing into anything.
How much should I borrow?
For most of us, buying a car is a significant financial
investment. In the excitement of ‘shopping around’, it can be easy
to lose perspective on the nature of the commitment. The more cars
we look at, the more most of us tend to want to spend.
If temptation is getting to you, take a step back and remind
yourself what your limits really are. Your new car should bring you
freedom, not weigh you down.
Check out the article Don't drive into
debt by Scott Pape, financial advisor and author of The
Barefoot Investor, who offers a few words on making a sensible
financial decision.
Personal loans and car loans
Once you’ve worked out what you can truly afford, you can start
‘shopping around’ for the loan that’s best for you.
A conventional personal or car loan is usually the simplest way
to go for most people. These options involve borrowing a lump sum
from a bank or financial institution, which is repaid in
installments over roughly two to five years.
Some banks will offer longer-term loans, but it’s important to
remember that while your repayments will be less each month over a
longer period, you’ll end up paying more interest.
If you’re buying a car from a dealership, the salesperson might
offer to arrange ‘in-house’ finance for you. Be careful – opting
for the dealer finance could land you with a more expensive loan
and more stringent terms and conditions. Always compare any offer
against a range of other finance options.
When should I arrange finance?
Many lenders will offer pre-approval on loans, so you can sort
out your loan before you start car shopping - that way, you know
exactly how much you have to spend.
What about leasing and mortgaging?
You might have heard about other types of car finance, such as
lease, hire purchase, Chattel mortgages and operating car leases.
These options are commonly chosen to finance company cars as they
can offer some significant tax benefits to businesses. They can be
pretty financially complicated, so it’s best to consult a financial
advisor if you want to learn more.
Lease and hire purchase options involve making monthly payments
until the end of an agreed rental period, at which point the lessee
pays the remaining amount to take full ownership of the car.
Chattel mortgages work in pretty much the same way, but offer some
extra tax incentives for businesses. Operating car leases are more
like a long-term car hire and don’t require you to buy the vehicle
at the end.
