Structuring your car loan - how to make it work for your budget

3 August 2016

Structuring your car loan - how to make it work for your budget

Right car loan for your budget

Getting a car loan to work for you isn’t just about choosing a provider that you can trust. It’s also about making sure that you structure your loan in a way that suits both your lifestyle and your needs. That usually means finding a repayment structure that fits your budget, and being able to borrow enough money to get the car that you want.

When you start researching your car loan options you may feel like you are faced with endless possibilities. But some forward planning can help you narrow down your options. Read on for our top tips on making a car loan work for you. 

Be realistic about what you can afford

When you’re choosing a car loan it’s common to start your calculations with the cost of your car, and work backwards from there. But if you want to make sure that your car loan is affordable, we recommend that you begin by working out exactly how much money you have available to make your repayments. 

That means taking a detailed look at your monthly and weekly budget, and adding up your total costs. This should include food, rent or mortgage, power, bills etc. Take this away from your income and you will have a good idea of how much money you have to play with. 

It’s important to include the cost of running the car that you want to buy in your calculations. If you currently own a car and are simply upgrading to a newer model, you could use your existing costs as a good benchmark for building your budget. 

If you’re new to car ownership then it’s worth doing some simple calculations to work out how much things like insurance, petrol, registration, and car maintenance are going to add up to.  

Once you’ve worked through all these costs you should have a good idea of how much you can afford to make in monthly payments. Now you need to think about how quickly you want to pay your loan off.  

Faster is always better when it comes to repaying loans

You know how much you can afford to repay every month, so now you need to work out much you want to borrow. It goes without saying that the more expensive the car, the longer you will be making payments on your loan. And the longer you have your car loan, the more you will be paying in interest. 

Getting a car loan that works for you is a balance between borrowing the amount that you need and keeping the term of the loan as short as possible to minimise the cost. You can shorten the duration of your loan by considering these three steps.

1. Maximise your deposit

A deposit is a great way to reduce the amount you need to borrow. Paying off a percentage of the car value upfront reduces the total balance of your loan and therefore the amount that you have to pay in interest. 

2. Minimise your interest rate

Interest rates are usually higher for individuals who have a bad credit rating. Look after your credit status and you can keep the interest that you pay on finance to a minimum, making it much cheaper to borrow money. That means that you can pay off any debt faster as you have less interest to deal with.

3. Review your position regularly

Financial circumstances often change, so when they do, you should review your car loan. If your rent changes; you get a pay rise; or you find yourself with some extra cash to play with: consider increasing the repayments on your car loan. You could either approach your existing provider to make the change or consider changing to a new provider, who could help you to focus on repaying your loan as quickly and cost-effectively as possible. 

Be prepared before you go shopping

One of the best ways to reduce the cost of your loan is to reduce the cost of your car. Getting your finance set up before you go shopping for your new set of wheels is a great way to increase your negotiating power and put you in control of your purchase.

Setting up your car loan up front will also help you to stay within the boundaries of what you need from your car. Car salespeople are experienced in encouraging their customers to trade up and include a variety of extras in their purchase. Avoid the temptation to include unwanted features by preparing a clear budget in advance and knowing exactly what finance you have available.

Buying the right car means finding a car loan that meets your needs. Taking the time to find a car loan that suits your budget can save you a lot of time and help you to avoid a lot of stress. It can also help you to ensure that you have the funds you need to be able to enjoy your new car.

It’s important to start by working out what you can afford, and then make the most of options to reduce the cost and duration of your loan. If you have any questions about what AA Finance can do for you, or if you would like more information about your car loan options, contact us today on 0800 500 555.

You can also try out our car loan repayment calculator here.

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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.

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