Cars are not just a practical means of transport, they are also an investment. Like any investment, they aren’t something that you shouldn’t rush into buying without first understanding the different financing options on offer. So here is our car finance fact sheet to help you find the best finance option for you.
Car Loan vs Car Lease
You’ve already decided that you want to get your own car, but before you can slip behind the wheel of your dream car, you’ll need to work out how you are going to pay for it. The two most common finance options are taking out a car loan or leasing a car.
Leasing is a lot like renting, what it means is that you are paying to use the vehicle over a set period of time. Leases come with a set amount to pay per month, a promise to maintain the condition of the vehicle and to stay within a set mileage. At the end of the lease you have the option of purchasing the car outright. If you aren’t sure about a vehicle or are looking at a premium vehicle – a car lease can help protect you from that initial depreciation drop on the value of your vehicle.
A car loan is exactly what you expect it to be, a loan for the value of the vehicle that you pay off over a fixed term. You can get a residual value payment option on a car loan. What this means is that you pay less per month for a set period e.g. 5 years, and then have a lump sum payment to make at the end of the term. This is also called a balloon payment.
Fixed vs Variable Interest Rate
If you’ve decided on a car loan rather than a car lease, the next thing to decide is whether you are going to have a fixed rate or a variable rate on the loan.
There are some obvious differences between the two. A fixed rate means that your interest rate is locked for the term of your loan; this means you know how much your monthly repayments will be and can be amazingly helpful if you are trying to stick within a strict budget. However, there is a downside to fixed loans. Most fixed loans will come with early termination fees if you pay off the loan early.
Secured vs Unsecured Finance
If you’ve chosen a car loan, you will also have to decide on whether you want a secured loan or an unsecured loan.
Secured loans are loans where you put up some form of security or collateral against the loan. Normally this is the car you have purchased. This means that the loan is less risky for the lender and if you aren’t able to meet the repayments the lender may take possession of your security to cover the repayments. Secured loans often have lower interest rates than unsecured loans, but you can risk losing your security if you aren’t able to make the minimum repayments.
Unsecured loans don’t need any form of security or collateral; however the interest rate is usually much higher than a secured loan. They are a lot less common and if you want an unsecured loan, you will need a spotless credit rating. If you can’t make the repayments, the lender may take you to court to recover the security and their losses.
You may have also heard the term comparison rate when looking into car finance. A comparison rate is an interest rate. It includes most charges and other fees that you might expect to pay during the term of your car loan. In this sense, comparing comparison rates for different loan products rather than interest rates will give you a much more accurate idea of whether a specific loan product is actually a good deal.
Lender vs. Broker
Another thing you need to know when looking at car finance is the difference between lenders and brokers. Lenders are the companies who lend the money. They are the ones that enter into contracts and agreements with you and who you repay the money to. Lenders can be credit unions, car manufacturer financial services, banks, non-bank lenders or other financial institutions.
Brokers are different; they are companies that have access to lots of different lenders and they will search through different products on offer by a multitude of lenders to find the best deal for you. Sometimes brokers may offer direct loans, but most of the time they will simply look for the best deal and then take care of all the administration aspects of the loan.
Repayments are the loan or lease payments that you have to make each month for the term of your loan or lease. If you fail to make a payment, then you may be charged penalty fees and can even default if you fail to keep up the payments.
If you fall into financial hardship, you can use something called a hardship variation. This is where you contact your lender to discuss varying the terms of your contract to make the repayments more affordable for you. This may mean that you don’t make any payments for a few months or that the payments are dramatically lowered. However, this is something that needs to be discussed with your lender, is based upon your individual circumstances and is agreed upon at their discretion.
Kiwi Car Loans
Kiwi Car Loans is one of New Zealand’s best brokers when it comes to car finance, and we understand that you don’t have the time to run around, so we save you time and money by taking care of it for you. Call us today on 0800 008 888 or get a no obligation 60 second finance quote now, and see how we can help make finance easy.
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