Cars are a staple of transport in Australia, with the country recording a staggering 19.8 million registered motor vehicles as of 31 January 2020.
Other than your house, your car will most likely be the biggest purchase you ever make. Understandably, you may need to apply for a car loan to finance such a big purchase. In fact, most of the 1 million new cars sold in 2021 in Australia will be financed through loans for cars.
But applying for car loans isn’t always a straightforward affair, especially for first-time buyers. To help you make an informed and confident decision, we outline 12 top factors to think about before starting the car loan application process.
Read on to learn more.
1. Your Budget
One of the first and most important steps of the car buying process is determining the amount you’re willing to pay for the car. Besides paying the price of the vehicle, you also need to take into account other expenses, including insurance premiums, maintenance, and fuel.
Once you’ve factored in all the costs, it’s easier to know how much you can comfortably spend on the car each month. This helps you determine the size of a car loan you can realistically afford.
2. Type of Lender
The next thing you need to think about is which type of lender will suit your needs best. Generally, you can opt to work with the dealership, a bank, or a credit union.
Banks and credit unions are similar in many ways. Both offer more friendly rates compared to dealership financing. But given that credit unions are typically not for profit, their rates tend to be the lowest.
Car dealerships usually collaborate with different lenders and usually line up the most suitable car loan options for customers in their network. Some of them provide in-house funding for subprime borrowers unable to qualify for funding elsewhere.
The type of lender you decide to work with will determine your experience in the entire financing process.
3. Your Credit
Lenders will usually check your credit report while evaluating your auto loan to assess your creditworthiness. Most lenders will decide whether to pre-approve you based on your credit score. With a good credit score, you not only stand the best chance of approval but also may be offered the most affordable rates.
Consider accessing your credit report months before you apply for a car loan. Doing so helps you see your credit score and take corrective measures to improve it.
4. Necessary Documents
Financial institutions follow the Know Your Customer (KYC) rule when giving loans. Expect your potential lender to verify your credit record. They’ll also require certain papers for validation.
Go out of your way to find out which documents are necessary for applying for an auto loan. Generally, lenders will need to see bank statements, your ID proof, proof of income, income tax return statements, proof of address, and other papers. Prepare these papers beforehand so your loan application process goes smoothly.
5. Loan Term Length
The length of your loan term describes the number of months or years you’re going to repay the car loan. That term may vary significantly depending on your credit, your lender, and the loan size.
Generally, the longer your loan term, the lower your monthly payments will be. The downside is that you’ll end up paying more in terms of interest over the length of the loan.
When it comes to loan term length, you want to opt for the option that makes the most sense for you based on your current financial situation. Always look to keep your monthly payments affordable while minimizing your interest rate.
6. The Annual Percentage Rate (APR)
The annual percentage rate refers to the money you pay the lender for borrowing from them. This money is also referred to as the interest rate.
The APR can significantly impact your monthly payments, as well as the total amount you end up paying over the term of your loan. Interest rates can differ significantly depending on your credit. The higher the risk your potential lender is taking by giving you a loan, the more the interest they’re likely to charge.
Note that interest rates can also differ from lender to lender. That’s why you need to visit several lenders and listen to their offers when comparing loan costs.
7. Down Payment
Typically, you’ll need to make a down payment to get an auto loan.
The rate required for the down payment may vary, but the goal is to remove a portion of the risk for the lender by letting them have some money in advance. A down payment will also reduce the amount you owe on your car, so the larger the downpayment you can make, the better.
What if you don’t have any money saved for a downpayment? You may still be able to access 100 percent financing, but the interest rates will certainly be higher.
8. Loan Processing Fee
Loan processing fees can add up, so you shouldn’t ignore them when applying for a car loan.
Note that some lenders will offer to waive off or reduce their processing fee to attract customers. They may also do so during festive seasons.
If your prospective lender offers to waive or reduce the loan processing fee, make sure they don’t charge you a higher interest rate to make up for the waiver or concession.
9. Pre-Payment Charges
One way to reduce your interest cost is to make pre-payment of your car loan. While most lenders will have no problem with you prepaying your loan, they’ll likely levy a charge for pre-payment. Read through the loan terms and conditions to get a better understanding of any potential levies.
Some lenders may also limit the number of pre-payments you can make per year or during the loan tenure, as well as the amount of prepayment allowed.
Generally, you want to work with a car loan lender with the least restrictions and charge you the least amount of money for preparing your loan.
10. Charges for Deferred Payments
Many lenders will allow you not to make payments for your loan for the first few months. If that’s the case with your lender, inquire whether you’re going to accrue interest on your car loan during the months you’re not required to make payments.
When you take out a secured car loan, your lender will require you to purchase comprehensive car insurance. The idea is to protect the vehicle as much as possible during the loan term. Your lender may help you get the right car insurance solution.
It also helps to get car loan insurance, particularly if you aren’t totally sure that your income will be sufficient to cover the loan payments. Some car buyers also go for loan termination insurance, whose purpose is to cover the loan balance if you cannot continue making payments.
12. Time Span for Application
Typically, your credit score is negatively impacted whenever a lender pulls your credit report. That’s why you want to apply as quickly as possible once your potential lender has checked your credit history. This helps you reduce the negative impact on your credit score.
Qualities to Look for in a Lender
Now that you know what factors you need to consider when applying for an auto loan, it’s time to hit the market for financing. Chances are, there are dozens of financial institutions in your area offering car loans. Choosing the right lender for you can make a world of difference.
Start by looking for a lender with a stellar reputation. Seek references from people you know who’ve used car loan facilities in the past. They may be able to point you to reliable lenders who you can talk to.
You also want to partner with a lender who has been around for a considerable amount of time. Such a lender will typically have enough industry experience to offer a financing solution that suits your situation perfectly.
A flexible lender is also a great find. Such a lender will have no problem offering you terms within your capability without breaking any rules.
Applying for Car Loans Shouldn’t Be a Hassle
Auto loans make it easier for aspiring car owners to get the vehicle they desire without paying the full price upfront. However, it’s important to consider certain factors before applying for car loans. In doing so, you can drive out of the car dealership feeling good about both your car and your financial situation.
Would you like to read more great content on car financing? Please, keep visiting our blog.