Funding your first car – what you need to know before getting a car loan
Buying yourself a set of wheels is expensive. If you’ve saved the cash to buy the car, that’s great. But realistically, most young people have to borrow money to buy a car. If that’s you, brush up on a few things before you sign on the dotted line.
Saving up and paying cash is the cheapest way to buy a car. Ask around and you’ll find friends who have done it. Surprising, huh?
Downgrade your expectations
We know you want to buy a Beemer with mags to impress your mates. Who wants to look like a nana, after all? If you have to borrow, then spend as little as you can. The smaller the loan the less interest you’ll pay and the more money you have to spend on other stuff, or even save. Don’t fool yourself into thinking you ‘need’ to upgrade when really you just ‘want’ a nicer car. The law of Bangernomics says it’s almost always cheaper to repair an older car than upgrade on finance.
Loan paperwork can have all sorts of tricky clauses in it. It’s best to know what you’re signing. Otherwise the fine print could come back to bite you.
Keep your credit record clean
It’s always easier to borrow if your credit record is squeaky clean. If not, you might need to get someone else to go guarantor (i.e. promise to pay if you can’t) and that’s not always easy.
Check out the bank of mum and dad
It’s time to do some dishes, and buy Mum flowers. The cheapest car loans almost always come from parents. If Mum and Dad don’t have the dollars, they may be able to extend their mortgage to pay for your car. If that’s the case you’ll pay around a third of the interest you would through a bank. Choice. Just be aware that your parents could lose their home if you don’t pay.
Car yard finance
As soon as you set foot on a car yard they’ll ask you how you’re going to finance your purchase. That’s because car yards and auction rooms often make more money out of your finance than the car itself. We know it’s easy to take the finance on the spot. But chances are it’ll cost you heaps in extra interest and charges. It’s best to get your finance pre-approved elsewhere before you go shopping. That way you can bargain your purchase price down.
Borrow from the bank
Loans from the bank are usually at lower interest rates and fees and better terms than from finance companies and car yards. This isn’t always the case. Regardless, always go to your bank and ask the question.
Get your money from a credit union
Credit unions are the complete opposite of spivs in suits selling easy finance. They’re required by law to put your interests first and they’ll often help you work out a budget for free. Staff will even sometimes haggle with the car yard on your behalf, says Rob Collins, NZCU Auckland general manager. “A lot of them hate us,” he says.
Make sure you can pay it back
Whether the loan is with the bank, a finance company, the car yard or even Mum and Dad, only borrow if you can afford to make the monthly payments. You’ll lose lots of money if the car is repossessed. The shorter the loan the less you’ll pay in interest overall. Try to choose a loan that allows you to make penalty free extra payments whenever you can.
Watch the fees
Car loans come with nasty set-up fees that can be as high as $700 and there may be other eye-watering charges if you miss payments.
Beware of the payment protection insurance
It’s too easy when you’ve fallen in love with a car to sign any paperwork put under your nose. If you have, you’ve probably just agreed to pay for overpriced payment protection insurance that covers you if you get sick or lose your job. Car yards, banks and finance companies often sell this cover to anyone, even if they’re not covered – which is the case for many self-employed people. There are cheaper ways to get better cover. Mechanical protection insurance is another expensive cover often tacked on to the sale automatically at some car yards. Just to make matters worse, you usually pay for both of these insurances upfront and can’t get a refund if you sell the car early.
Do background checks
You can check if there is finance owing on a vehicle by the last owner by visiting the Personal Property Securities Register at ppsr.govt.nz. Searches cost $3. Always check the motor vehicle traders’ register before buying from a dealer: motortraders.med.govt.nz/cms. Complain to the Motor Vehicle Disputes Tribunal if something goes wrong with a purchase through a car yard.
Now it’s time to go shopping for your first set of wheels.