Buying a car is something that most of us will do, and it’s likely we will go through the buying process multiple times throughout our lives. For most of us, a car is a significant purchase so we do recommend you have a chat with your Financial Adviser to work out if that ‘Lambo’ is going to break the bank.
Once you work out what you are looking for in a car, it’s time to think about how you’re going to pay for it. With so many financing options out there we wanted to give you a guide for the best way to approach it.
While saving up to buy your new set of wheels from your own cash savings sounds like a great idea, it may not be the practical approach. When we find ourselves in need of a car, it’s usually a pretty immediate event, so for most of us, car finance will be a must.
Car finance through the dealership
Most of us are familiar with dealership finance – that is the finance that is organised for you through the dealership where you purchased the car, but, are there any other options?
The answer is yes, you can seek out a car loan yourself rather than rely on the dealership finance. You could do this by going to your bank and inquiring about a car loan, however, there is another option that could serve you better again, that is using a broker.
Getting your car finance using a broker
The primary benefit of using a broker over seeking out the loan yourself is that the broker has access to greater bargaining power as well as a wide variety of lenders, meaning that they will be able to find the loan that is best suited to your situation as well as providing you with the most competitive rate.
For the above reasons, we will focus primarily on the two options of Dealership finance versus seeking a car loan through a broker.
In dealership finance right for you?
So you are signing the contract to buy your car and the dealer offers you in house finance – what are the main points you need to consider to determine whether or not the dealership finance is right for you?
Well first things first, dealership finance is easy. The representative will do all of the paperwork for you, there is nothing much to consider in terms of options, and using dealership finance may even enable you to negotiate the sale price down a little.
That sounds great, so what’s the catch?
Well, there are a few things to consider. Firstly, the interest rates offered by the dealer can appear very low, and sometimes be at 0%, however it is important to ensure that your specific car model is included in these offers. It is also important to understand that the interest rate is not the only factor that will impact your repayments – it is often the fees that can have the greatest impact on your repayments. It’s worth doing your sums and confirming what your total repayment figure will be rather than getting too carried away with the enticing interest rate.
Another option used by dealers is to include a balloon (residual) repayment, at the end of the loan term. The balloon is a lump sum usually around 20% of the loan amount that does not attract any interest, meaning the repayments will be lower. At first, this seems like an attractive option, however the lump sum must be paid in full at the end of your loan term, which usually results in the loan being refinanced.
You have a $20,000 loan with a term of 4 years and a balloon repayment of $4,000 due at the end of the loan term.
Your interest will only be calculated on $16,000 (winning!) but you still need to repay the lump sum aka balloon payment of $4,000 at the end of the four years (ouch!). Unless you are actively putting money aside throughout the loan term to repay the balloon it is likely you will need to refinance at the end of the four years.
The finance offered by the dealer can also be restrictive in terms of extra repayments, which is important to keep in mind if you are looking to pay off your loan sooner than the specified term. Keep an eye out for exit fees here too!
So with all of that in mind what sets the broker apart from the dealership finance?
Benefits of using a broker
Brokers have access to a variety of lenders, which means you are more likely to secure a competitive loan that caters to your individual situation. In addition to this, brokers have more bargaining power and can usually negotiate a better interest rate than if you were to approach the lender directly yourself.
Another bonus is that a loan from a broker will not include a balloon unless you specifically request one. This means that at the end of your loan term the loan is fully paid off and the car is all yours. The loan terms available from a broker can be for longer periods too, (up to 5-7 years) which means you can reduce your periodic repayments, or go for that next model up!
A broker can help you out if you are looking to buy from a private seller, and can also help you seek a pre-approval so this was your finance is in order before you even sign a contract.
In short, the broker can provide greater flexibility and more bargaining power to terms to best suit you and lower the likelihood of surprises like balloon payments or exit fees… so why wouldn’t you use a broker?
The biggest factor to consider is time. If you need your car immediately and don’t have time to shop around for the best loan terms to suit you, the dealership finance is the winner.
To wrap up, if you are in the market for a car get in touch with your broker sooner rather than later. You can work out your what you can afford, what your repayments will look like and you will have peace of mind knowing that you got the best deal.
Send us an email or give us a call today for all questions relating to your car finance.
We can help with your car finance
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.