Used Car Finance
Purchasing a new car can be quite a stressful task. You will be harassed by 'try-anything' car salesman begging you to buy a car. You will have concerns about the car you are looking at – is it a lemon, does it drive ok, does it suit you?
One of the biggest causes of stress is money, we all don't have enough of it, and we all want more of it. Buying a new car is no exception.
What is a loan?
A loan is a form of debt. Debt is a negative quantity of wealth that originates in a transfer of wealth in which the owner does not immediately receive compensation in wealth. Debt allows you to do things you would otherwise not be able to do. Commonly, people use it to purchase houses, cars and many other things too expensive to buy with cash.
Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
The borrower receives an amount of money from the lender, which they pay back, usually in regular instalments, to the lender. The service is generally provided at a cost, referred to as interest on the debt.
Legally, a loan is a contractual promise of a borrower to repay a sum of money in exchange for the promise of a lender to give another sum of money.
How much can I borrow?
This depends on which financial institution you choose to borrow from, and what loan product you have chosen. Savings & Loans offer an easy to use calculator that allows you to view an approximation of how much you can borrow based on your income.
Fixed interest, or variable?
A fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict future payments.
A fixed interest rate is based on the lender's assumptions about the average interest rate over the fixed rate period. For example, when the interest rates are low, fixed rates are normally higher than variable rates because interest rates are more likely to rise during the fixed rate period. The opposite holds true as well.
Secured or Unsecured?
A secured loan is a loan in which the borrower pledges some asset (e.g. the car your about to buy) as collateral for the loan. When borrowing money, a secured loan will almost always ensure you a lower interest rate.
However, creditors will often be strict about which car you can purchase and from where. Some common restrictions include a used vehicle which is no older than 5 years and must be purchased through a car dealer.
Unsecured loans are riskier for the creditor; therefore they incur higher interest rates.
What information do I need to borrow money?
If you are not already an existing customer of the financial institution that you are applying for your loan at, then you will need 100 points of identification. It's always best to have too much information then not enough. Bring along your driver's license, credit cards, debit cards, and Medicare cards. If you have it available bring your birth certificate.
If you are going for a secured loan, you will need some additional information about the car you are purchasing. You will need a copy of the registration papers along with the sellers name and address.
In some cases you may also need a road worthy certificate. The RAA offer reputable and cost effective used vehicle inspections, which will give you and your creditor piece of mind.
How much should I borrow?
When borrowing money for a car, make sure you borrow enough to cover initial expenses that may occur during your purchase. You may need to borrow a bit more than the cars worth to cover unexpected costs like stamp duty or car insurance.
You should work out how roughly how much these costs will set you back before proceeding with your loan.
External resources:
- How much stamp duty will I pay?
- AAMI Insurance
- Budget Direct
- Just Car Insurance (Extremely good for the under 25s)
- NRMA Car Insurance
Credit rating
A credit rating assesses the credit worthiness of an individual. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the applicant being able to pay back a loan.
You may not be able to finance the car you wish to purchase if you have a bad credit rating.