Buying a car is a big-ticket purchase that often requires a loan. When a buyer picks the right car loan, it can alleviate the financial weight of the vehicle purchase. Get the wrong one, and it becomes a burden to carry for years.
To make a car loan work, you need to understand its components and use them to your advantage. In particular, you must know how interest rate works and which type you should go for. These will affect the total amount of your loan repayment.
One big decision you have to make is choosing between a fixed-rate car loan and a variable-rate car loan. How do you know which is better for you? Read on to find out.
What is a car loan?
Let’s start with the basics. A car loan allows you to borrow money from a credit provider for the specific purpose of purchasing a car. Considered as a personal loan, it is also subject to approval, which will be based on your capability to pay back the money. Your credit score, savings, assets, employment, and existing credits will all be taken into account during the approval process.
Car loans are either secured or unsecured. A secured loan can be distinguished from the latter by the presence of collateral (the car or any personal asset), which will serve as security for the lender should the borrower fail to pay back the loan. It usually has a lower interest rate compared to an unsecured car loan, which has a higher rate because of the bigger risk that the credit provider is taking.
Banks, credit unions, building societies, and other private lenders are some of the financial institutions that can offer you a car loan. Some dealerships have in-house car financing as well.
How does a car loan work?
Once approved, you’ll sign a loan contract, where the amount of money, loan term (usually one to five years), interest rate, repayment schedule, and other loan details are stipulated. The fund will then be released to you or the dealership to complete the car purchase.
Afterward, the repayment of the loan will commence based on the start date indicated in the contract and will continue on schedule (weekly, fortnightly, or monthly) until the principal loan, plus interest, is fully paid.
The amount of interest you’ll be paying depends on whether you and the credit provider agreed on a fixed or a variable rate.
This type of car loan has a fixed rate, which means the interest will not change for the entirety of the loan term or a certain period of it. With a fixed interest rate, you’ll know exactly how much you’ll pay each week or month.
The advantage of getting a fixed-rate car loan is budgeting stability. You’ll know what to expect each repayment schedule, enabling you to manage your household budget easily. And even if the rates suddenly go up, this type of loan will not be affected at all.
Meanwhile, a variable-rate car loan has an interest rate that could go up or down throughout the loan term, depending on the present market rates. This means you must have good cash at the ready because your repayments will also vary.
With a variable-rate car loan, there’s a possibility of huge savings in loan repayments whenever the interest rate goes down. Also, this type of car loan offers more flexibility. Banks and lenders will usually allow additional repayments and early full-settlement of the loan, free of charge.
Fixed-Rate Vs Variable-Rate
So, how do you decide which one to get? The answer really depends on your preference and financial situation. If you don’t like the risk of a variable rate, which can shoot up and result in higher loan repayments, then go for the more stable fixed-rate car loan. It’s also your best choice if you don’t see change happening in your income anytime soon.
On the other hand, if you’re expecting a promotion or more success with your business, then you would want to make extra repayments to pay off the loan early. You may also want to refinance the loan when your credit score improves to get a better interest rate. All of these require more flexible financing, just like a variable-rate car loan.
Before making a decision, make sure to do a comprehensive evaluation of your finances.
Tips on how to get the best loan for you
Aside from choosing the right type of car loan, there are also other ways to get the best loan for your car purchase. Here are some tips you may find useful:
1. Make sure to own a good or excellent credit score before applying for a car loan. It will allow you to negotiate for a better rate with lenders.
2. Don’t just settle with the bank or credit union nearest you. Shop around with as many lenders as you can to find the best car loan deal you can have.
3. Many lenders give better car loan deals if you have a co-signer. Just like the collateral of a secured loan, the co-signer will also serve as security to the lender. That’s because in the instance that you are unable to make repayments, the co-signer will be billed in turn. This lessens the risk for the banks and credit unions, allowing them to offer the best loan deals to borrowers.
4. Save up for a bigger deposit so you’ll need to borrow less and get a better rate.
5. Find a lender who offers a pre-approved car loan. It will enable you to know exactly how much you can borrow, which will help you shop around confidently with dealers.
Aussie Car Loans Can Help You
If you’re looking to take out your first car loan you can talk to the team at Aussie Car Loans about our range of financial services. We can help you find the best loan product that will match your specific needs.
Celebrating over 30 years in the industry, Aussie Car Loans offer competitive fixed rates for new or used cars, with a fast and simple online loan application and flexible loan terms.