Financial Pitfalls to Avoid When Getting a Car Loan
Outside of a house or apartment, a vehicle is likely to be one of the biggest purchases you make in your life. It is also one that is likely to require you to apply for car finance. As experienced finance brokers, we see people make a lot of mistakes when they are trying to secure finance. Most of these mistakes are avoidable with a bit of extra know-how. Read on to find out more about financial pitfalls to avoid when getting a car loan.
Financial Pitfalls #1: Only borrow what you can afford
We have all set our eyes upon one make of car or another and decided that it must be ours. But it is important not to let your passions get the better of you. You do not want to enter into a financial agreement that could potentially put you under financial stress.
Do you know what you can afford in terms of car finance? Make sure to have a look at our handy car loan calculator. Simply punch in the numbers and it'll let you know a ballpark repayment figure.
Did you know that there are 2 easy ways to decrease your loan repayment?
The first is to increase the term of the loan. When the loan term is increased, the regular loan repayment is reduced, albeit over a longer period of time. However, using a secured car loan facility, you can still make extra repayments if you wish. Perhaps you are due a tax refund, get a bonus or have a pay rise. This extra money can be paid off your loan, which reduces both the term of the loan and the interest paid.
The second way to reduce your loan repayments is to include a balloon repayment option in your loan. A balloon is a lump sum payment that is due at the end of the term. Basically, your car loan is split into 2 parts. The first part is paid via regular repayments and the second is paid as a lump sum at the end of the loan term. https://moneysmart.gov.au/loans/car-loans
Financial Pitfalls #2: Finance is not a one-size-fits-all solution
Where banks and some other institutions may assume that the same finance solution is right for everybody, AAA Finance is very aware this is not the case.
AAA Finance has access to over 40 different lenders, unlike a bank or car dealership which only has one, maybe 2! Having multiple lenders allows us to cater for our diverse client needs. Each lender has different lending criteria that we navigate on behalf of our clients.
We also have a range of car loan options to suit both individuals and business owners. For wage earners you can choose from a secured car loan or unsecured loan. You can even use your current car as collateral to get a secured personal loan. Business clients have no doc, low doc car loan and full doc chattel mortgage options to choose from. Our brokers are experts in structuring your car loan to suit your specific needs. Because of this, we ensure that our clients receive a loan and repayments schedule that is tailored to fit their needs.
The moneysmart website reinforces the point that it is important to look at your car loan options before you go to a car dealership. High pressure selling, being caught up in the moment and emotional buying often see people sign finance contracts that have exorbitant interest rates. The other situation we see is a dealership applying for finance, to their one and only lender, where there is no chance of an approval for that particular clients circumstances.
Financial Pitfalls #3: Protect your credit score
Your credit score is a number that gives lenders an indication of your risk profile. A high score lets lenders know that you have had loans before and have paid them off on time. The risk is low that you will default on your loan. A lower score might indicate a late loan repayment, loan default, use of buy now pay later lenders and / or multiple credit enquires in a short time.
So how does your credit score affect your car loan. Firstly, it determines if in fact you can get a loan, and secondly it is a significant factor in determining your loan interest rate. Hence, protecting your credit score is important.
There are 3 common pitfalls that can affect your credit score.
- Ignoring or neglecting our credit score can be a costly mistake. Before applying for a car loan, take the time to review and improve your credit score if necessary. This can be achieved by paying off outstanding debts, rectifying errors on your credit report, and maintaining a good credit history.
- Applying to multiple lenders / brokers at the same time. Each lender will place an enquiry for finance on your credit file. Having 6 or more enquiries in a 6-month period is considered a busy credit file. This behaviour will start to decrease your credit score and can even change a loan approval into a decline. Choosing a reputable brokerage, such as AAA Finance, to process your loan application before shopping for a car is vital.
- Avoid getting your loan declined. An experienced finance broker who is qualified and accredited will only apply to the one lender who they believe will get you an approval at the the best rate.
Financial Pitfalls #4: Only borrow what you need
Commonly, this is a pitfall AAA Finance sees younger borrowers fall into. There is often the temptation to borrow a little extra to buy a flasher car or motorbike. While it might not be as significant as a mortgage, taking out new car finance is still a big commitment, with a term of up to seven years. As the old adage says, it is always best to borrow within your means. After all, finance is meant to help. If you cannot meet the repayments, you are harming your credit score and future borrowing potential.
Financial Pitfalls #5: Don't redraw on your mortgage!
On the other hand, this is a pitfall we often see older borrowers stumble across. The appeal to redrawing from a mortgage to secure funding for a car, boat or caravan loan is that the interest rates are lower.
However, the rates are lower because the length of the time spent repaying these loans is so long. Because they're tied to a mortgage, this can be 20 years or more. This means borrowers end up paying more once the loan is repaid.
Appy for car finance today with AAA!
To discover a car loan solution that is right for you, call AAA Finance today!
- Easy over-the-phone application
- Most loans are approved with 24 hours
- Competitive interest rates
- AAA customer service
- Experienced finance brokers