Skip to main content
Blog

Car loans explained

Car and car loans

Let’s be honest, purchasing a car is a pretty big deal. Most of us don’t have the readily available cash for such an acquisition, and the likely scenario is that we will have to borrow some of the money to pay for it. The money required can be substantial depending on the car you choose, and you could be paying off a loan for years. Therefore, be smart and don’t live beyond your means of getting a huge loan for that dream purchase.

The facts

Basically, a car loan is similar to a personal loan, but more tailored for a specific type of purchase of buying a new or used motor vehicle. You will borrow an amount of cash which you will agree to pay back over a period of time (referred to as the term). The typical term will be around 1 to 5 years, and you will need to enter a credit agreement with the chosen lender. Over the term of the agreement, you will either pay a fixed or variable interest rate (the interest may fluctuate over the term), plus any fees or charges. Whilst the fixed rate can be the sensible option due to set monthly repayments, the variable option can have its benefits should deflation occur and interest rates dip. On the other side, if inflation occurs and rates rise, you could be paying more overall than if you opted for a fixed loan term.

A car loan can either come in a secured or unsecured format. If it is secured, you will need to put up an asset as a security for the loan, should you miss multiple repayments, the lender has the right to seize possession of that asset and sell it to recover the money you owe. Secured loans are usually available only for newer cars, as they are more valuable as an asset. With an unsecured loan, you do not need to pledge any asset as a security, but you will likely pay a higher rate of interest because the lender is taking a bigger risk. If you purchase a car from a dealership, they may have finance options available and whilst this might be easier as a one-stop-shop, it’s usually more expensive than choosing a bank or shopping around online for a loan.

Research your options

Make sure you look around the market for the available loan options that are right for your circumstances. It’s imperative that you get the best credit offer prior to making the choice on which car you want – so shop around! Most lenders will pre-approve for the loan on the basis of you knowing which car you want and the associated costs of the purchase. Be very careful with leasing options, you could find yourself not having the right to buy the car at the end of the lease period. You may have the option to make an offer for the car, but you will probably have to come up with a lump sum of money to buy it outright.

Don’t forget

  • Before you take out a loan, budget accordingly to ensure you can afford the repayments required.
  • If you are not in a position of stable employment, you should consider allocating more of your savings to pay the deposit in addition to the loan.
  • Save up as much as you can borrow ideally, this takes the pressure off on paying more interest.
  • Remember to allow for interest rate rises and anything that might affect your future income.