Should You Get The Cheapest Car Finance?

Should You Get The Cheapest Car Finance?

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Shopping for the lowest car loan interest rates?

If you're looking to get the cheapest car loan you can find to buy your next car, you'll need to understand how you can qualify for the cheapest car loan interest rates.

Here are some tips to get ahead.

There's more to think of than just your interest rate though, so read on to find out how you can truly get the best value for money on your next car loan.

Getting a Low Interest Rate

The first thing most people think of when looking for their next car loan is what their interest rate will be. The interest rate is affected by lots of other factors, like:

  • Your loan term
  • The total loan amount
  • Whether the loan is secured
  • Your credit rating
  • Whether you provide a deposit towards the purchase

So while getting the best interest rate is important, it's just one small factor that determines the overall cost of your loan.

Can A Car Loan Be Too Cheap?

If it looks too good to be true, it probably is - especially when it comes to negotiating your car finance.

Always negotiate the car purchase price separately

If you are arranging car finance at the dealer, you won't know for sure if you are still getting a good deal overall unless you negotiate the sticker price of the car separately to your car finance.

This way, the dealer can't increase the price of the car to disguise the cost of car finance. If you're thinking about using dealer car finance, it can't hurt to get a car finance pre-approval before you get to the dealership.

This gives you a negotiating tool once you've set the price of the car and any extra features. Stick to your plan, and if they can't beat the finance offer you can use your pre-approval to buy the car.

Know Your Loan Term

When you take out a longer loan term, your interest rate could drop, but be aware that you will still pay back more in total with a longer loan term, so while your regular repayments might be cheaper, the total cost of the loan works out more expensive.

Beware a Mid-Term Rate Increase

You've seen credit cards offering 0% on balance transfer. If you read the fine print, you will usually find that this zero percent interest only applies to the balance that you transfer, not any new spending you add to the card.

You'll probably also find that the 0% rate ends after a short time, often 6 or 12 months. After this, you will pay the 12.99% or 16.99% interest rate for the balance on the card.

Car finance operates in a similar way. If you see a super-low rate advertised, make sure that you read the fine print and find out what the interest rate will be once the low-interest rate period ends. Using a car loan repayment calculator, you can work out whether this is actually going to be a better deal than car finance with one interest rate for the whole term.

Low Rate Car Finance Using Mortgage Redraw

Another option you might have come across for buying a car is to redraw on your mortgage. This might look convenient, as it keeps all of your debts in one place, plus you borrow the money at a super low-interest rate.

But there is a catch.

Instead of paying off your car finance of, say $30,000 over three years, when you add it to your mortgage, you'll repay it over the remaining life of your mortgage, up to 20-30 years. It costs you a lot more in interest in the long run.

Case Study: Buying A Car With Mortgage Redraw

Redrawing $30,000 from your mortgage at an average interest rate of 7.2% over 20 years will cost $26,700 in interest.
Using a car loan with a five-year loan term and 10.4% interest rate to borrow $30,000 to buy a car will cost you $15,000 in interest.

You may also pay a home-loan refinance fee, so make sure that when you are deciding the best way to finance your car, that you take all of the costs into consideration.

Convenience comes at a price

When you take out finance through the car dealership or redraw on your mortgage to purchase a car, it might seem like you can get a great finance deal.

However, once you sit down and crunch the numbers, you'll find that you might be paying a lot more for your car than you'd planned to by the end of the car finance term.

So How Can I Get Cheap Car Finance?

If you are serious about getting cheap car finance, put some time into doing the research and crunching the numbers before it's time to purchase. After all, you're researching the car you want to buy carefully, and you don't want to make it too expensive by not doing the same for your car finance.

Just like you can get a car broker to find your ideal car for you, if you are short on time then you can have a car finance broker research and compare your cheapest car finance options too.

It's actually a free service, and just like when you buy a car, you can tell your lending manager exactly what kind of finance you're looking for, and they will do the work of sourcing the best cheap car finance from a variety of bank and non-bank lenders.

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