Car and personal loans and more

Car loans are offered by banks and other financial institutions.

Typically, car loans have an upfront payment (or trade in) and then fixed repayments for a fixed period – usually up to five years. The amount borrowed can vary as a percentage of the cost of the car. Some car loans can even be structured to defer a large percentage of the repayment to a final large balloon payment. A large balloon payment may seem like a good idea initially but less so at the end of the loan term – especially if your vehicle has lost value (depreciated) rapidly in the meantime. Try and avoid owing more at any time than the vehicle is worth.

Car or vehicle loans are usually secured loans where the vehicle is the security or collateral against which the money is loaned. That means the car may be repossessed by the lender if you fail to honour the repayment structure. It also means the borrower will usually require proof of comprehensive insurance for the vehicle, etc.

No running costs are included in the repayment amounts.

Consumers will often establish a car loan with banks, credit unions or other financial institutions with which they have an existing relationship – a home mortgage, for example. However, it can pay to shop around and compare interest rates.

One benefit of a car loan is that you can apply and be pre-approved for a car loan before you start shopping for a new or used car. This pre-approval will be subject to the lender’s requirements (such as a credit check), but may simplify your maths at the pointy end and help your negotiation power with the dealer or private seller.

Another advantage of a car loan over a lease is that you typically end up owning the vehicle.

Everything you need to know about car finance

Personal loans are also offered by banks and other financial institutions.

They differ from car loans as they are usually unsecured and do not encumber the car itself as collateral for the loan. Note, however, lenders can still take legal action if you default on your loan.

Personal loans have fixed repayments for a fixed period – usually up to five years. The amount borrowed is not related to the value of the car purchased, but rather the ability of the borrower to pay the amount back as determined by the financial institution.

No vehicle running costs are included in the repayments.

One advantage of using a personal loan when purchasing a vehicle is that you can start with the borrowed cash effectively “in your pocket”, knowing exactly how much you can spend.

One downside is that often personal loans attract higher interest rates and establishment fees than other auto finance types – so, ultimately you are likely to end up paying more for your vehicle.

New and used car buyers with equity in property including the family home can refinance or redraw to purchase a vehicle. This can be a good way to buy, but the devil is in the detail

The key benefits of redrawing are not having to apply for a new loan, and mortgage interest rates typically being much lower than personal or car finance rates.

A word of caution, however… Unless you specifically increase your home loan repayments to match the amount borrowed for the car, you are effectively spreading your car interest payments across the remaining term of your home loan – which may add up to more than a shorter car loan at a higher interest rate.

The car is not encumbered under such an arrangement (the security is your property instead) and any fees are as established in your home loan contract. Like personal loans and car loans there are no running costs covered. And you are negotiating with the borrowed cash effectively “in your pocket”, knowing exactly how much you can spend.

Refinancing clearly has its advantages. However, the process of revaluing your home or property and the refinancing fees can be off-putting.

This is arguably only a good option if you have accrued substantial equity in your home since the original loan was taken out and if you can access substantially lower interest rates to offset the inconvenience, establishment fees, etc.