Whether it's time to upgrade the family car or buy your first set of wheels, the car loan process can be daunting. That’s why we’ve created this handy guide to learn all the ins and outs of securing the perfect car loan for your unique circumstances.
With a few simple steps, you can be on your way to getting behind the wheel of your dream new or used car in no time.
The first step is to figure out how much money you can afford to borrow. This will depend on a number of factors, including your income, your other debts, and your credit score. Once you have a general idea of how much you can afford, you can start shopping around for car loans.
There are a few different types of car loans to choose from, so it's important to compare rates and terms before making a decision. Some car loans will have a lower interest rate but a higher monthly payment, while others will have a higher interest rate but a lower monthly payment. It's important to find the car loan that best fits your budget and financial needs.
Different types of car loans
Let's talk about the different types of car loans you may come across.
- The first is a personal loan. This is a lump sum of money that you borrow and then pay back over a fixed period of time, usually between one and five years. A personal loan can be used for just about anything, including car loans. While the interest rate on personal loans can vary depending on the lender, according to RBA data, the average interest rate is 14.41% for variable loans and for a fixed personal loan it's 12.42%.
- The second type of finance option is a car loan that can be used to finance a business vehicle or a personal ride. Car loans are specifically for the purpose of buying a car and usually have terms of two to seven years. Again, the interest rate will vary depending on the lender as well as the lending criteria, but it's typically lower than the interest rate on a personal loan.
Most banks provide secured car loans in the range of $10,000 to $100,000. This means your loan is secured over the automobile and offers you a lower interest rate than an unsecured loan. However, it also implies that the bank can utilise the vehicle as collateral and sell it if you are unable to fulfil your obligation.
Read more: '6 Benefits Of Buying A Car On Finance'
Calculating your borrowing power
Now that you know the different types of car loans available, let's talk about how to calculate how much you can borrow. Your borrowing capacity is an important number to know when you're car shopping because it will help you stay within your budget. There are a few different ways to calculate your borrowing power. One way is to use an online car loan calculator, this will give you a general idea of how much money you can afford to borrow.
How do I figure out my borrowing power?
To calculate your borrowing power, you'll need to consider a couple of things, namely your income and your living expenses (including debt repayments). To get started, grab a copy of your most recent payslip. If you're self-employed or earn income from sources other than a regular job, you'll need to provide tax returns or financial statements as proof of income. Once you have your payslip (or tax return/financial statement), work out your after-tax income. Then, subtract your current living expenses from this number. This will give you an idea of how much money you have left over each month to put towards a car loan.
How does my credit score impact this?
Your credit score is one of the most important factors in determining your borrowing power. A higher credit score means you're more likely to qualify for a loan amount with a lower interest rate. This can save you a lot of money over the life of the loan. If you're not sure what your credit score is, you can contact these credit reporting agencies for your free credit report:
What is a comparison rate?
When you're car shopping, you'll probably come across the term ‘comparison rate.’ So what is a comparison rate? A comparison rate is the annual percentage rate (APR) plus any additional fees and charges that may apply. This helps you compare different car loans to see which one is the best deal. Keep in mind that the comparison rate is not the same as the interest rate. The comparison rate includes the interest rate plus any additional fees and charges, such as application fees, monthly service fees, and early repayment fees. Now that you know how to calculate your borrowing power and what a comparison rate is, you're one step closer to getting the car loan that's right for you.
How do comparison rates and interest rates differ?
The main difference between comparison rates and interest rates is that comparison rates include all the fees and charges associated with a car loan, while interest rates only include the interest charged on the loan amount. For example, let's say you're looking at two car loans. Loan A has an interest rate of 12% and an annual fee of $100. Loan B has an interest rate of 14% and an annual fee of $200. If you compare the two loans based on interest rates alone, Loan A looks like the better deal. However, when you compare the two loans based on comparison rates, Loan B is actually the better deal. This is because the comparison rate takes into account all the fees and charges associated with the loan. When you're car shopping, make sure to compare car loans based on their comparison rate, not just their interest rate. This will help you make sure you're getting the best deal possible.
How much can I borrow for a car loan based on my income?
In a nutshell, you can only borrow as much as your income and expenditures allow. The amount of money you may borrow largely depends on factors such as income and expenses. Your car loan repayments shouldn't exceed 20% of your after-tax income. This means that if you're taking home $4000 per month after taxes, your car loan repayments shouldn't be more than $800 per month. You can use an online car loan calculator to figure out how much money you can afford to borrow. Keep in mind that this is just a general estimate and your actual borrowing power may be different. It's always a good idea to talk to a lender before making any decisions.
Do I need a deposit for a car loan?
Most car loans will require a deposit, which is typically between 20% and 30% of the car's purchase price. However, there are some lenders who may offer 100% financing, which means you don't need to put any money down. If you're not sure how much money you need for a deposit, talk to a lender. They'll be able to give you an estimate based on the car's purchase price and your financial situation.
What else do I need to know about car loans?
Before you apply for a car loan, there are a few things you should keep in mind:
- Make sure you shop around and compare different car loans before you make a decision.
- Read the fine print carefully and make sure you understand all the terms and conditions.
- Ask about any fees and charges that may apply, such as application fees, monthly service fees, or early repayment fees.
When you're car shopping, it's important to keep in mind that the amount you borrow will affect your monthly repayments. If you're not sure how much you can afford to borrow, we recommend talking to a lender before making any decisions.
How to improve your borrowing power
If you're not happy with your borrowing power, there are a few things you can do to improve it:
- Save up for a larger deposit. The bigger your deposit, the less money you'll need to borrow. Reducing your living expenses can also free up more money for a car loan.
- If you have a bad credit history, try to improve your credit score by paying your bills on time and maintaining a good credit history.
- Shop around and compare different car loans to find the best deal.
Everyone dreams of owning a new car. However, before you start car shopping, it's important to understand your borrowing power. This will help you avoid overspending and getting into serious debt. The advantages of securing the right car loan for your circumstances are manifold. Not only will you be able to afford the car of your dreams, but it also means cost savings in the long run.
When it's time to start car shopping, keep in mind how much you can afford to borrow and what the comparison rate is. This will help you find the best car loan for your needs. If you're not sure how much you can borrow get in touch with the Driva team of finance experts today, happy car shopping!