Buying a car is an exciting time. You’ve chosen the model you want, the year of manufacture, and all the added specs… and then it comes to finding the right loan to pay for it.
For lots of people, a car loan is their first real brush with the world of finance. Here are six things to make sure you understand before you sign on that dotted line.
The interest rate you’re paying
Finding the right interest rate is crucial to making sure that your car loan fits within your budget, both in the short and the long term.
As a starting point, research what the lender is offering and compare it with what else is available on the market. And in the meantime, make sure your finances are car loan-ready by checking your credit score.
Generally speaking, the higher your credit score is, the better your chances are to secure a good interest rate. If you find there is room for improvement, it might be a good idea to focus on boosting your credit score before shopping for your next set of wheels. Check out our quick guide to credit reports here to learn more.
Are there any other costs involved?
The interest rate isn’t the only cost you need to factor in, as there may be other fees and charges associated with the loan.
These usually include a loan establishment fee, and either mandatory or optional insurances and warranties. Plus, there can be break fees (for paying off the loan early) and fees for missing payments.
That’s why it’s important to read the contract thoroughly and ask the lender what all the fees and charges would be over the full repayment period, in a single (total) dollar amount. This will help you budget and know where you stand.
How long are you set to be paying off the loan? Usually, the shorter the loan term, the less you’ll pay overall.
Sometimes, it can be tempting to extend the term of your loan and spread smaller payments over a longer period of time. But keep in mind that the longer the term you choose, the higher the overall interest costs you’ll be paying over time.
Understand what you’re committing to and what that means. The law requires that any lender explains the terms of the contract before you sign up for a loan. They are required to give you a disclosure statement with the total cost of the loan, repayments, how much interest is charged and other fees that might be applied.
Try our handy loan calculator to estimate what your monthly payments might be across various terms.
What you’ll pay to pay it off early
Sometimes, your circumstances change and you want to pay off a loan more quickly than initially anticipated. Most lenders will accommodate that, but it often comes at a cost. Find out what you’d have to pay if you decided that you wanted to be rid of your loan at an earlier date than your current agreement stipulates.
What happens if you want to sell before the loan is paid?
If you have a long loan term, there’s a chance you might want to upgrade to a new car before the loan is paid off.
Would your lender let you do this? Many finance providers allow you to effectively refinance so that the trade-in of one car pays off the existing loan, leaving you free to take out another. It’s worth checking out how this will happen, especially if you think you’d like to sell privately.
What insurance is required
Most lenders will require you to have insurance on your car. This ensures that the asset they’ve lent money against is still there if they need to make a claim on it. Often, they’ll require a full insurance policy, which can be more expensive than a third-party option. Understand what is required to protect your vehicle before you take out the loan.
Like to discuss your options?
If you are looking for a car loan to buy your next car and would like to learn more about your options, please get in touch. Debt servicing is just one of the key factors that lenders take into account, so it’s a good idea to have a clear understanding of your finances before applying.
Call the team at AA Finance on 0800 500 555, seven days a week between 9 am and 5 pm. We’re here to help.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.