Posted May 2017 by Melissa Abraham-Smith
Buying a car can often leave you with a to-do list a mile long. What make? What model? What year? And that’s just the start of it. Add to that the fact that the average cost of a secondhand vehicle can sit anywhere between $10,000 and $50,000, and it’s clear that how you finance your next vehicle purchase is pretty high up on that list.
Should you finance via a Bank or Credit Union? Is a personal loan or dealership financing better? Which option will save you the most money? Your to-do list is long enough without the added financial stress of just how, exactly, you're going to come up with the cash.
To help you check this off your list sooner rather than later, today's guide is aimed at helping you make the decision of how, when, and where to finance your next vehicle so you can get back to researching the important stuff like mileage and safety features.
Up first? We're talking budgets...
1. Finalise your budget before you enter the dealership
Impulse purchases are an everyday occurrence - maybe you sprung for that brand name shampoo this week, or chucked a chocolate bar in your bag at the checkout - but it’s not the kind of word you want to be throwing about when you’re talking about buying a car.
So, before you get carried away browsing TradeMe, checking out your local dealership, or picturing the new car in your driveway, ask yourself this question:
'How much can I really afford to spend?'
It’s a fact of life that there’s often a difference between what you’d like to spend, and how much you can actually afford. While we’re not suggesting that you buy any old lemon, spending beyond your means is the quickest path to growing debts, and that’s the last thing you want or need.
The solution? It’s the same as almost all financial decisions: you need a budget. In fact, it’s the most essential step in working out what you can afford to borrow, what car you can actually afford to buy, and the kinds of make, model, and mileage you can expect to afford.
While it isn’t as exciting as dropping into the dealership on day one, sit down and take a good, long look at your finances, your budget, and how much you can realistically afford to spend without breaking the bank or putting yourself on the brink of financial hardship.
Tip! Try and keep your car repayments equal to - or less than - 20% of your total disposable income. To calculate this, simply take one fifth of what’s left once you pay off your monthly debts, bills, and other living expenses.
2. Find a finance option that fits your finances
Once you know how much you can afford to spend, you need to figure out how you’re going to get the funds together. If you have enough cash on hand in a savings account or term deposit, then you’re pretty much set, but not all Kiwis have access to this kind of money on the spot.
This leaves finance as your next best bet, and thankfully there are a number of options at your disposal like dealership finance, credit cards, or a personal or vehicle loan. While this amount of choice can feel more than a little overwhelming, as long as you keep your goal of finding the best rates and lowest fees in mind, then you’re set.
The first major option is dealership finance, which is a popular form of finance that’s offered through your local car dealership. When you drop into your dealership and enter into a contract to buy a car, you simply sign up for finance and agree to pay back the amount over a period of time.
Dealership finance is popular for a reason: it’s one of the most convenient options, as a dealer can offer it to you on the spot - rain or shine, day or night, weekend or week day - but you do pay a premium for this convenience.
Dealership finance often carries a fair amount of costly baggage, in the form of fine print, terms, and conditions which all make it difficult to know exactly how much you’re paying, how long you’ll be paying it, and what your final interest rate is.
Car finance, on the other hand, provides one of the cheapest ways to finance your next vehicle, with the added peace of mind of clear terms and conditions. The process is easy, too. You simply apply for a personal loan, and then use the funds to pay for your purchase.
A personal loan isn’t just cheaper, it also removes the temptation to up your spending on the day, and ensures you’re not stuck with the fine print of a dealership finance deal. Instead, you can take much needed time beforehand to carefully weigh up your options, find the best rates, and nail down the terms, length, and rate of your loan long before you set foot in a dealership or hit ‘Buy!’ on TradeMe.
Ultimately the choice here is yours, and will depend on your individual circumstances, how much you can afford to spend, and which form of financing provides you with the greatest peace of mind. Just remember to take things slow and consider all of your options; rushed decisions only ever cost your more in the long run.
Tip! If you can afford a deposit, this is a great way to buy a more expensive car without having to increase your loan. The more you pay upfront, the less you’ll pay in interest. Sounds like a
win/win situation to us!
3. Track down the best interest rate you can
Nobody likes high interest rates. They drain your account, they cost you more, and they turn that relatively small loan into a constant, nagging debt that just won’t go away. This is why it’s so important to shop around and find the best rate you can when you’re financing your next vehicle.
A low interest rate helps you pay off your loan as quickly as possible, which reduces the amount you’ll actually pay over the life of your loan. An unsecured loan, for example, is one of the easiest to get, but you’ll also be paying a higher interest rate. By securing your loan with the vehicle you’re purchasing, however, you’ll gain access to a lower rate and save a whole lot over the life of your loan.
It’s also worth checking with any financial institutions that you’re already a member of, and seeing if they offer discounts or lower rates for existing customers. In the case of NZCU Baywide, our Loyalty Saver account offers lower personal loan rates for our loyal customers, which helps you save when it comes time to pick up that new set of wheels.
Tip! Your credit rating can affect your personal loan rate, so check yours online and then do whatever you can to improve your credit score (such as consolidating your debts) before you apply.
Finance for your new vehicle? Check!
There’s a lot to think about when buying a new car. What are the safety features like? Is it fuel efficient, and what are the running costs? Is it for work, play, or a little of both? The list is endless.
With the tips we’ve outlined above, you should be able to easily cross off the pressing question of how you'll finance your purchase by deciding on a budget, finding a great financial provider, and landing the best rate.