September 2008
Recently, a friend picked me up to go to dinner. His vehicle is the sort of car that would look great on fire. The car is around ten years older than me, two doors are different colours from the rest, my seat had been restuffed with newspaper and major rust represented the only crumple zone the car had to offer.
Dinner was great, the company pleasant and the ride home fine until the car managed to eject several critical engine components into the street. As it was a cold and extremely rainy night we opted to chat through some finance options for his new car while waiting for the tow truck.
Though we don’t always buy the most practical or sensible vehicles, we must ensure that we get the best finance available. There are many ways of financing your car and perhaps the most common methods are personal loans and leases.
Generally, personal loans are unsecured loans that will have a repayment term of 5 to 7 years. The repayments are calculated to clear the debt over that term. Simply put, the more you borrow and the higher the interest rate the larger the repayment. Personal loans will often attract an interest rate of between 11 to 15%. Depending on your employment history and credit status, this could be even higher.
Leases are different to personal loans and are often used for people who change cars regularly, or who are able to claim their car as a business expense. An accountant will be able to advise whether this would be the case for you. These loan products generally run for 3 to 5 years with the final payment being a large ‘balloon’ repayment.
This represents the future value of the car. Vehicles loose their value over time, so as you clear the debt your car will be worth less. The ‘balloon’ will generally be between 20 – 50% of the purchase price of your car. Always ask how the balloon repayment will affect you repayment. Larger balloons mean smaller repayments. The risk however is that the ‘balloon’ may be larger than the actual value of you car when you sell or upgrade leaving you with a negative value.
Few people buy cars with cash and the above are only some of the products available. They can be set up through your bank, the car yard or better still, a broker. Shopping for car finance is no different to shopping for a car. Have a budget and do a little looking around. Ask the hard questions before committing. Check all fees, charges, early termination costs and interest rates. Get a couple of quotes and if possible pay the debt of faster. It can save you heaps on interest.
By the time the tow truck had arrived we’d identified some good options that would facilitate more reliable mobility. Standing in the rain we both laughed as the car was lifted onto the truck. The bumper sticker read: “Sometimes I stop suddenly for no reason at all!”
Evan Davis
