Is It Worth Getting a Car Loan?
With the increasing need to travel either for work or leisure, getting a car is a no-brainer. But let's face it, cars are not cheap!
Whether you’re buying a new or used car, getting a vehicle will demand some significant financial management.
So, is it worth it to get a car loan? We've compiled everything you need to know about the ins and outs of car finance so you can make an informed decision.
What Is A Car Loan?
A car loan is a specific type of personal loan you can use to buy a new or used car when your savings and other finance options cannot cover the total cost of the vehicle.
If you want to buy a brand new car with a loan, you must commit to making monthly repayments over a fixed term - which includes the lump sum borrowed and the interest accrued from the time you take out the car loan.
It’s best to compare your options when choosing the best car loan to take out instead of depending on the first option your car dealer offers you.
There are other factors to consider when taking out a car loan like your personal financial circumstances and if there are additional fees involved.
How Does Car Finance Work?
Car finance involves a formal vehicle finance arrangement between the following parties: the buyer, the vendor, and the car lender.
The car finance process works through the following steps:
- Compare your best eligible car loan options from more than 30 lenders
- Decide which lender you’d like to proceed with
- If approved, the lender will lend you a certain amount of money to buy your dream car
- Approve and sign the purchase agreement with the vendor of your purchased vehicle, and the lender will pay the vendor on your behalf
- You’ll make regular repayments to the lender over a period of 1-7 years to pay back the loan
When applying for a car loan, you should note the average amount most cars cost; they range from a couple thousand to $100k+ for luxury vehicles and these loans generally are between 1- 7 years in length.
The best way to find the ideal car loan is to research and compare your options. We can help here at Driva, our mission is to help you navigate existing finance lenders in the market. We take the hard work out of the online car loan application process from start to finish providing a seamless and hassle-free experience.
Applying for a loan
Lending criteria and documentation needed
Different lenders and loan offers will have varying requirements, but for all our lenders you must be over 18 and an Australian citizen or a permanent resident to qualify for the loan. You must also provide a valid driver's licence.
You’ll also need to provide a few documents, which may include proof of income and expenses and details of assets and liabilities. You’ll also need to provide a recent bank statement. The financial standing documents are required for lenders to have proof of whether or not their customer has the capabilities of paying back the loan.
Get your finances in order
The first thing to do before financing a car (as with any loan or credit situation) is to rectify any finance-related issues.
Your credit score will impact your car loan interest rate and the funds available to you, which is why it is so important to deal with any past agreements before getting a new loan. For example, consider paying off any existing loans and credit cards, as well as removing any financial commitments that are no longer needed.
Even if you have never taken out a loan before or your credit is not the best, Driva may still have loan options for you or at the very least, be able to recommend ways to improve your credit rating for the future. If you'd like to figure out how much you could borrow be sure to check out our easy car loan calculator here.
Pros and Cons Of Car Finance
Are car loans a good or bad idea? It’s important to weigh up the benefits and drawbacks before taking out a loan.
- You don't have to pay the purchase price with your own money all at once
- It can help you improve your credit score if you make all your repayments
- The monthly payments can ease the hit on your savings and finance.
- If you're not financially stable, paying interest rates on top of the monthly payment is more expensive in the long run
- Poor payment performance will badly affect your credit score.
- Old and new cars depreciate quickly. The value has probably declined by the time you own the vehicle, and a variable interest rate can affect the true cost!
How Do You Compare Car Loans?
Here are several factors to consider when choosing between different car loans!
Interest rates are the rate of interest you need to pay on the amount you borrowed. It is essentially additional fees accumulated when you borrow money from your lenders.
A comparison rate is an interest rate percentage that gives you a general idea of the expected loan cost. While it doesn’t take into account stamp duty, it does include almost all of the monthly fees that lenders will charge you.
It’s really important to remember to compare the same loan amount and terms when looking and comparing comparison rates.
When buying a new car or any other car, there are other fees to pay, whether in cash or credit.
These are the fees you might pay: the monthly service fee, the default fee or missed payment fee, and any other fees necessary.
The loan term is an essential factor to consider when comparing these loans. Car loan terms are generally between 1 and 7 years.
Shorter terms will often have lower interest rates but require the buyer to pay the full amount faster than usual. Longer terms have lower monthly repayments but will have a higher interest rate.
Make sure you carefully understand the loan conditions before applying with a lender. There may be certain conditions you cannot comply with, making certain loan services not the best pick for you despite positive reviews or references from others.
Frequently Asked Questions
To help you further, let's answer some FAQs about the topic.
What Is the Best Way to Get a Car Loan in Australia?
There are many ways to get a loan in Australia, like taking out a personal loan, using credit cards, and borrowing money from friends and family.
If you’re looking to compare all of your best eligible loan options in one place, it makes sense to do so with Driva!
Given the many benefits of car finance, it is no surprise why it is the preferred loaning service in the country.
Why Use a Car Loan Over Other Loans?
Car loans can prove better than business loans and other loans for security purposes.
Why is that the case?
Car loans use the vehicle itself as security. When comparing other loans, a business loan uses your capital as security, and a home loan uses the property as security!
You may lose your capital and property if you cannot pay your loans in time; however, you only lose your vehicle with the former!
So, is Financing a Car Worth it?
After discussing the essential points, do you think car financing is right for you? Here's a recap checklist for your reference.
Car Finance Is for You If:
- You're confident that you can repay the loan without problems.
- You don't mind the interests and added charges.
- You don't want to shell out a hefty sum of cash upfront. Financing a car eases the blow.
- Paying in whole means dipping into your emergency funds and savings. Don't!
- You're not in a rush to fully own the vehicle.
- You need a good or second-hand car as soon as possible, and there are no better alternatives.
Car Finance Is NOT for You If:
- Your monthly income is unstable - your finance is not in the best state.
- You can quickly pay cash without damaging your emergency funds and savings - essentially, your bank account.
- You don't think the additional interest rates and fees are worth it.
Getting car finance is worth it if you know what you're getting into and you can pay off your loans.
Researching and knowing how the process works will make car financing hassle-free and you’ll have an easier time with car ownership!
Getting a car is exciting, but if you rush into a high-interest loan that you can’t afford, it can also lead you to a downward spiral of endless debts. Before committing to a loan deal, don't forget to assess your situation, needs, and capacities.
Don't be too intimidated, though. You have us to guide you through the process. Learn more about car financing on our website, or if you’re ready to get started you can access your personalised quotes here (with no impact on your credit score!).