Car Buying Finance Options

By Joe Kenwright and CarPoint.com.au


It's time for a new car and having made the decision to buy, the next question is often not what car, but how you are going to pay for it
Financing a car can be a minefield to the uninitiated, especially when the salesperson starts bandying about terms like hire purchase, novated leases, residuals and balloons. But despite the confusing nature of the jargon, most of the finance products on offer are fairly simple and with a little understanding you can make sure you are getting the best deal for your situation.With the wide range of car prices now existing you need to consider the choices carefully. Unless you plan to hand over cold, hard cash for your next car -- and if you've ruled out leasing -- then you are one of thousands of car buyers annually who finance their purchases through a car loan of some kind. Your car-buying experience will include two separate purchases -- one for the car and one for the loan. They can be researched and shopped for separately. Research your finance options and check that you qualify for a loan before visiting dealers to shop for the car.When car shopping, don't discuss finance until after the price of the car and the value of your trade-in have been settled. Avoid discussing car prices in terms of monthly payments. Shop for loans aggressively, comparing them and asking lenders to give you their best rates. Don't view the process as asking for assistance. Develop a working knowledge of financial terms and arrangements, and have current local interest rates at your fingertips before discussing finance with the dealership.

WHERE TO SHOP
Shop around. Telephoning and searching the Internet for information usually work for obtaining ballpark figures on interest rates. But when you get serious, make an appointment and visit loan officers in person. There are a number of alternatives for finance, ranging from the dealer where you buy the car to credit unions to banks.

TAX BREAKS
Depending on your employment and income, you may find certain financial arrangements generate tax breaks that can significantly cut the bottom line. A visit to an accountant may allow you to buy a better car than you first thought. Key words to check out are leasing, novated leasing and salary sacrifice.If you are after finance with a bit more flexibility, then you should probably investigate specialised finance companies. These basically fall into two categories; those associated with the banks, like Esanda which is 100 percent owned by the ANZ Bank or those tied in with carmakers such as Ford Credit or GMAC.Interest rates vary little between the two types but those associated with the carmakers, called vendor finance companies, probably have a slightly wider range of products because they are solely focussed on automotive finance.Either way they both claim a far greater flexibility than the banks and are able to tailor finance packages and interest rates to individual circumstances. The finance is also usually arranged at the dealer at the same time as you buy the car and approvals can often be made within a couple of hours.

CAR DEALERSHIPS
While your first impression may be to forgo dealer finance as being more expensive than other kinds, it pays to consider the option carefully. It can be convenient -- a one-stop deal. Typically, you can get a loan approved while you're at the dealership. Convenience doesn't necessarily cost more. Indeed, subsidies available to dealers from manufacturers can allow a dealership to undercut other lenders.

BANKS & CREDIT UNIONS
Banks are also very active in the car loan market, typically offering a variety of loan types. Some banks give lower rates to customers who open, or already have, cheque and savings accounts with them. Interest rates at credit unions generally are lower than at other loan sources. If you are a member of a credit union or can join one in order to get a loan, it may pay to shop there.

FINANCE COMPANY
Another option is to obtain a loan through a finance company. For people whose credit rating is less than perfect, working with a finance company, either directly or through the dealer, often makes it easier to secure a loan.

INTEREST
The greater the risk to the finance provider, the more interest you pay. The shorter the loan, the less interest you pay. And if your circumstances are unsettled, consider an insurance policy to cover your payments if something goes wrong. Some institutions will insist on this safety net but it adds to the cost.The interest rate is a big factor but because there are several ways of calculating this, the final amount you end up paying at the end of the loan is the most important figure. You should shop around for the best finance deal just like you would any other consumer product. Some used car dealers will offer special finance rates as an incentive.

THE BOTTOM LINE
Regardless of their source, all loans can be compared by their Annualised Percentage Rates (APR) to determine their relative cost. While lenders may compute interest charges on instalment loans by various methods, the APR adjusts the actual rates to reflect the loan's true cost per year. As long as the APRs are the same, the costs of any loans you are considering also are the same.

WARNING
Most financial arrangements are structured so that payments cover mainly interest for the first year or two. If you have to sell the car early, the sale price may not cover the loan or lease because the car's value will have dropped faster than the amount owing. Extra money will usually be required to break a financial arrangement in the first two years. If a seller invites you to take over the book or pay the balance of a lease or loan, check it out carefully.