7 Things to Look Out for in a Car Loan Contract
Check these before you sign
Signing a car loan contract commits you financially to making repayments on the loan for three to seven years, depending on your agreement.
With a potentially large sum of money on the line, you want to be sure that your contract doesn't hold any hidden surprises. Here are some things that you need to know:
What is a car loan contract?
A car loan contract is the agreement that you sign with a lender that sets out the arrangements dictating how much they lend you, the fees charged for the loan of the money, and how you will repay the car loan.
It is a binding legal agreement that can be enforced under the law if either party breaches the contract.
It's important to understand the obligations that you agree to when you sign a car loan contract.
If you do something that's in direct breach of the terms of the contract, there are legal consequences which are usually set out in the contract itself.
What happens if you breach the car loan contract?
The consequences of breaching a contract will depend on whether you have a secured car loan or an unsecured loan.
The main way that you can breach your contract is by missing repayments when they fall due. This will mean that:
- You'll have to pay the late payment fee
- Missed repayments that are 14 days late can show on your credit report
- If you miss a lot of repayments, the lender may record a default on your credit file.
- If you have a 'secured car loan' then the lender may repossess and sell the car to recover the remaining balance of the car loan.
You'll want to avoid this situation, so here's a guide to what you need to look for before you sign your car loan contract:
7 Things to look out for in a car loan contract
1. Interest
Interest is the sum charged to lend you the money you borrow to purchase your car. It's expressed as a percentage, and calculated daily based on your remaining loan balance.
Interest will usually be charged to your loan account monthly.
Before you sign the loan contract, you need to know what your interest rate is, and whether it's a fixed or variable interest rate. This information will be on your loan contract.
Sometimes a lender or car dealer will advertise a 'special' low loan rate, which may increase to a standard rate part way through the loan contract. Check if you have one of these deals, and make sure that you know what the interest will be once the special ends, and how this affects your regular payment.
2. Loan term
This is the agreed timeframe that you'll repay the loan amount over. Knowing this means you can plan for the future when the debt will be repaid.
3. Balloon or residual value
A residual value is a lump sum payment that falls due at the end of the car loan. They are most common on novated lease arrangements or chattel mortgages.
You'll need to know what your Loan to Value Ratio is if you plan to trade in the car at the end of the loan to make sure that the car's value can cover the residual value of the car loan. Choosing a car with slow depreciation ensures that you aren't left with an upside down car loan.
4. Account fees
Some lenders won't charge you an account fee to purchase your car, but others have a monthly fee. It's usually fairly small, but it's good to be aware of any additional fees you pay before you sign to make sure you are getting the best possible deal.
5. Early repayment fees
If you terminate your car loan contract before the end of the loan term by paying out the balance owing, you might have to pay an early payout fee.
Likewise, if you make additional repayments to the required payment set out in your car loan contract, you might have to pay a small fee.
If you think you'd prefer to pay out the loan early, definitely find out what these fees will be in advance, as you might be better off selecting a car loan with a lender that doesn't charge these fees.
6. Monthly payment
Your monthly repayment figure includes your principal repayment amount, interest and any account keeping fees. This required payment will be set out in the car loan contract.
7. Hardship provisions
What if you can't make your car loan payments for some reason? While this isn't something that you want to consider, it's best to find out what to expect before you sign the contract rather than when you're in an unforeseen stressful situation.
If you can't make your next car loan payment, contact the lender before it's due to ask for a compassionate break from payments.
Signing your car loan contract
Follow this checklist when you review your car loan contract and you'll have a solid understanding of what your rights and obligations under the agreement will be.
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Or if you're ready you can start a no obligation car loan application to find out the options.
Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.