Getting a car loan is not as difficult as many believe but it’s definitely something you should prepare for. You need to understand the financial terms and technical processes prior to your application or you’ll be overwhelmed.
Good thing CarFinance is providing Aussies not only with a variety of car finance solutions but also with the information to make loan applications easier.
So, here are the things you need to know about the process of getting a car loan.
Different types of car loans
Whether you’ll work with a broker or go directly to a lender, you need to decide which type of car loan to apply for. There are two types of it: a secured and unsecured car loan. Getting a secured car loan means you are providing collateral to the bank or lender as security against financial loss should you fail to pay for the car loan.
The collateral can be equity on your home, stocks, or other assets. In Australia, most secured car loans are taken against the new car itself. So, if you default on your loan, the lender will repossess the car you bought using the loan.
Meanwhile, applying for an unsecured car loan doesn’t require you to provide collateral. It’s riskier for the bank or lender to provide this type of car loan. That’s why unsecured car loans usually have higher interest rates compared to secured car loans.
Key components of Car Loans
These are the key components that compose a car loan. They have big impacts on your long-term finances, so make sure to understand them completely.
- Interest Rate – An interest is an amount charged against the borrower based on the loan. An interest rate varies from lender to lender. However, it’s usually expressed in percentage that indicates an annual dollar figure to be paid. The interest rate will greatly affect the total amount of your car loan. So, make sure to compare rates between lenders before sending out your application.
- Loan Term – The agreed time period when the borrower will pay for the car loan. In Australia, loan terms are usually between three to seven years. Choosing a longer period will make your monthly repayments smaller. However, in this case you’ll pay more interest by the end of the loan term. Most borrowers choose a five-year loan term.
- Repayments – These are the payments for the car loan in installment per week, fortnight, or every month. You should choose the frequency of your repayments based on your financial situation. If you opt for a more frequent repayment schedule, you’ll be able to pay off the loan faster and with less interest.
- Balloon Payment – Some lenders allow borrowers to make a balloon payment. It’s a large payment that will be made at the end of the loan term. This will essentially reduce the regular repayments by the borrower. If you choose to have a balloon payment on your car loan agreement, you’ll pay more interest over the loan term.
- Fees and charges – Other the loan amount and interest, you’ll have to pay for other fees and charges when getting a car loan. These include the processing fee, establishment fee, encumbrance (security rights) registration fee, ongoing fee, documentation fee, early repayment fee, and late payment fee.
Borrowing power
When getting a car loan, you need to consider how much you can afford based on your financial situation. This is your borrowing power. Overestimating your borrowing power will get you into deep financial trouble in the future. This may lead to missed repayments and loan default. The good news is CarFinance has a free Car Finance Calculator that you can use to find out exactly how much you can borrow based on your chosen loan term.
Credit History and Rating
In Australia, most banks and lenders consider the borrower’s credit history and rating during the approval process of the car loan. Your credit history basically tells how well you were able to pay your previous and existing credits. The credit rating is the measurement of your creditworthiness based on your credit history, the amount you owe, the length of credit, types of credit account you have, and your new credits.
In Australia, the three major credit bureaus are Equifax, Experian, and illion (formerly Dun & Bradstreet). Banks and lenders will request your credit report from these agencies and refer to it when approving your car loan. Borrowers with good to excellent credit history and rating get easier approval and lower interest rates.
However, your poor credit score and history don’t always mean a loan rejection. Many lenders still offer car loans to borrowers with bad credit, just like CarFinance.
Car Loans with CarFinance
With this information at hand, you’ll understand the process of getting a car loan much better. You’ll be more confident when you go to the banks or lenders and you’ll surely have a better chance to get a car loan pre-approval.