{"id":182,"date":"2021-01-29T09:00:00","date_gmt":"2021-01-28T22:00:00","modified":"2021-04-14T15:24:07","type":"post","status":"publish","title":"How should you finance your car in 2021?","content":"\n<p>The Coronavirus pandemic continues to <a href=\"https:\/\/7news.com.au\/lifestyle\/health-wellbeing\/global-coronavirus-death-toll-exceeds-500000-c-1130887\" target=\"_blank\" rel=\"noreferrer noopener\">wreak havoc<\/a> around the world, causing people to re-think the way they conduct their lives.<\/p>\n\n\n\n<p>This is no different in Australia.<\/p>\n\n\n\n<p>With people shunning public transport due to safety concerns, and with domestic travel outpacing international travel, theirs been an uptick in demand for cars.<\/p>\n\n\n\n<p>While new car sales are down to historic lows, the used car market has never been stronger. <\/p>\n\n\n\n<p>Australia has a large used car market, particularly in comparison to our smaller population, which means there&#8217;s a wide supply of cars to choose from.<\/p>\n\n\n\n<p>Even before looking for the type of car you want to buy, it\u2019s a good idea to figure out how much you can afford on a weekly or monthly basis to cover the cost of owning a car.<\/p>\n\n\n\n<p>Aside from the purchase price\nitself there are several other ongoing costs that you should consider\nincluding:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Registration<\/li><li>Insurance<\/li><li>Fuel<\/li><li>Servicing<\/li><li>Tyres<\/li><\/ul>\n\n\n\n<p>You can use tools like&nbsp;<a href=\"https:\/\/www.moneysmart.gov.au\/\">MoneySmart<\/a>&nbsp;Cars\u2019 app to calculate the actual cost of owning and running a car, factoring in some of the above.<\/p>\n\n\n\n<p>You can get a <a rel=\"noreferrer noopener\" href=\"https:\/\/pricespeoplepay.com.au\/valuation-report\" target=\"_blank\">Prices People Pay Valuation Report<\/a> to work out what you should be paying for a used car considering the current market conditions.<\/p>\n\n\n\n<p>Once you\u2019ve established what your budget looks like it\u2019s probably a good idea to get an idea of what finance options you have. Aside from using straight cash there are a number of options available, all with different benefits.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Car Loan<\/strong><\/h2>\n\n\n\n<p>The most commonly used financing\noption in Australia is taking out a car loan, with a bank or finance company. A\ncar loan is simply a personal loan, specifically taken out for a car. If you\nare a business a car loan can also commonly be referred to as Chattel Mortgage.\nBelow are some of the different aspects to consider in a car loan:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Fixed or\nVariable interest rate<\/h3>\n\n\n\n<p>Fixed interest rate loans means the interest rate is set to one rate for the entirety of the loan term, so your repayments (whether they are weekly or monthly) will always be the same amount.<\/p>\n\n\n\n<p>This can be useful when budgeting as you don\u2019t need to worry about any fluctuations in your repayments. However, if you wanted to pay off the loan early or just make extra repayments then this may attract additional fees.<\/p>\n\n\n\n<p>Variable interest rate loans have\ninterest rates that vary over the course of the loan, depending on how interest\nrates move in the overall market. This means your repayment amounts can change\nover time, however you generally will be allowed to make extra repayments\nwithout any fees or charges.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Secured\nor Unsecured Loan<\/h3>\n\n\n\n<p>A secured loan means the car is\nattached as security to the loan, so if you can\u2019t pay the loan back then the\ncar can be repossessed by the lender to recoup their money.<\/p>\n\n\n\n<p>Because this provides more security for the lender the interest rates are generally lower for secured loans. Unsecured loans are the opposite, the car is not held as security for the loan and hence interest rates are generally higher. In effect, unsecured loans are simply personal loans.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Balloon\nor No Balloon<\/h3>\n\n\n\n<p>Most lenders will allow you to\nadd a balloon payment to the end of your car loan if you meet their lending\ncriteria. A balloon is simply a lump sum payment you make to pay off the\nremaining balance of the loan as the final repayment.<\/p>\n\n\n\n<p>So, for example, if you are\npurchasing a car for $30,000 then you could take out a loan for $20,000 with a\nballoon of $10,000. This means you will pay repayments over the loan term to\ncover the $20,000 and then one final payment of $10,000 at the very end.<\/p>\n\n\n\n<p>By having a balloon, it allows\nyou to reduce your weekly or monthly repayment amounts which can help with\nbudgeting. However, you run the risk of having to pay a large amount at the\nvery end of the loan.<\/p>\n\n\n\n<p>It\u2019s common for consumers to sell\nthe car at the end to recoup the funds required to pay the balloon amount off,\nwhich means understanding what your car is worth becomes valuable in this\nscenario.<\/p>\n\n\n\n<p>Lenders will generally allow you\nto set the balloon at a value that suits you, as long as it is below the\nballoon limit they have for the age bracket the vehicle will be in at the end\nof the loan. The older the vehicle becomes then the lower the balloon limit\nwill be.<\/p>\n\n\n\n<p>Using&nbsp;<a href=\"https:\/\/pricespeoplepay.com.au\/valuation-report\" target=\"_blank\" rel=\"noreferrer noopener\">Prices People Pay<\/a>&nbsp;you can get an early read of what your car might be worth in the future so that you can be comfortable in deciding what amount to set the balloon.<\/p>\n\n\n\n<p>If you elect not to have a\nballoon, then you pay off the same amount every week or month which provides\nmore consistency for budgeting. However, your repayments will be higher.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Length of\nthe loan term<\/h3>\n\n\n\n<p>The loan term you choose will also have a large influence on your repayment amounts. Generally, lenders can offer loan terms from anywhere between 1 and 5 years with many willing to provide even shorter or longer terms.<\/p>\n\n\n\n<p>Generally, the longer the loan\nterm the lower your weekly or monthly repayment amounts. However, this also\nmeans that over the course of the entire loan you will end up paying more\ninterest, all else being equal.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Trading\nin your existing car<\/h3>\n\n\n\n<p>If you have an existing car you\nwant to replace or no longer need then you\u2019ll have the option to trade it in\nand reduce the loan amount for your new car.<\/p>\n\n\n\n<p>Lenders use different methods in determining the value of your car and some allow some negotiation. Therefore, having access to all the used car information in&nbsp;<a href=\"https:\/\/pricespeoplepay.com.au\/valuation-report\" target=\"_blank\" rel=\"noreferrer noopener\">Prices People Pay<\/a>&nbsp;can ensure you have a firm sense of your cars market value and what you can get for it from your lender.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Lenders<\/h3>\n\n\n\n<p>In terms of finding lenders, there\nare a myriad of providers out there. Having a look at&nbsp;<a href=\"https:\/\/www.canstar.com.au\/car-loans\/\">Canstar<\/a>&nbsp;or&nbsp;<a href=\"https:\/\/www.finder.com.au\/car-loans\">Finder<\/a>&nbsp;is\na great place to start your journey in seeing what rates are available and\nconsidering the various options, such as the ones above, that would suit your\nneeds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Car Leasing<\/strong><\/h2>\n\n\n\n<p>A car lease is like renting a\ncar, with the main difference being you can make a payment (the balloon or\ncommonly knowns as the residual value in leasing) at the end of the lease to\ntake ownership of the car. This residual value will generally be reflective of\nwhat the car is worth at the end of the lease. Unlike car loans where you own\nthe car from the very beginning, a car lease means that you don\u2019t own the car\nbut are simply \u2018renting\u2019 or \u2018leasing\u2019 it from the lessor.<\/p>\n\n\n\n<p>This can be an attractive option\nif you don\u2019t want to actually own a car for a long time, but simply need it for\na period of time that\u2019s longer than what you would usually rent a car for. There\nare a few additional differences to a car loan that you\u2019ll need to note for a\ncar lease:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>If you want to terminate the lease early there are usually early termination fees that apply.<\/li><li>A car lease usually dictates how many kilometres you can travel for the duration of the lease. If you travel above and beyond the allocated kilometre allowance, then you can be charged excess kilometre charges.<\/li><li>Lessors will usually provide terms on what condition the car should be at the end of the lease. So, for example, if the car has plenty of scratches, dents and other damage then there\u2019s a chance you will be charged additional fees to cover the cost of the damage.<\/li><\/ul>\n\n\n\n<p>In the United States, car leasing\nis incredibly popular however in Australia it is very much a niche market with\nlimited offerings.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Novated\nLeasing<\/strong><\/h2>\n\n\n\n<p>If you work for a company that\nprovides Novated Leasing then this can be an attractive option for you. Novated\nLeasing works just like a car lease however the lease repayments are made by\nyour employer on your behalf from your pre-tax income. As a result, there can\nbe some tax advantages depending on your financial circumstances.<\/p>\n\n\n\n<p>In addition novated leasing providers also package together all the running costs of your vehicle including registration, fuel, insurance, servicing and tyres. These can all be included in your lease repayments which can really simplify your budgeting and provide certainty in your expenses.<\/p>\n\n\n\n<p>However, similar to a car lease,\nyou don\u2019t actually own the car in a novated lease which means you will need to\npay out the balloon (commonly called the residual value) at the end of the\nlease if you want to take ownership of the vehicle. In addition, the same\nconditions listed above for a car lease around early termination, kilometre\nusage and vehicle condition charges will apply.<\/p>\n\n\n\n<p>Unlike car leases, where the\narrangement is simply between you and the lessor, a novated lease also involves\nyour employer. While there are many novated lease providers in the market, your\nability to take out a novated lease will also depend on your employer.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Hire\nPurchase<\/strong><\/h2>\n\n\n\n<p>A Hire Purchase works similar to\na car lease except you always take ownership of the car at the end of the term.\nAlso, unlike a car lease, there doesn\u2019t have to be a balloon, so you can simply\nmake the same repayments for the entirety of the hire purchase term and then\nown the car at the end.<\/p>\n\n\n\n<p>Hire Purchases are largely only\nused by commercial businesses as they can give certain accounting advantages.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Guaranteed\nFuture Value<\/strong><\/h2>\n\n\n\n<p>One of the finance options\ngaining traction in Australia is a Guaranteed Future Value (GFV) loan. GFV\nloans are simply car loans where there is always a balloon that is guaranteed\nby the financier. What this means is that at the end of the loan you can\neither:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Pay out\nthe balloon, just like you would in a normal car loan<\/li><li>Or simply\nhand the car back and the financier will pay out the balloon for you, since\nthey have guaranteed it<\/li><\/ul>\n\n\n\n<p>The GFV is set by the financier\nand generally reflects a slightly reduced value of the car. This means at the\nend of the loan there is a higher chance that the car will be worth more than\nthe balloon amount, leaving you with some equity if you wanted to sell the car\nyourself or trade it in for another car. However, if the car is worth less than\nthe GFV then you can simply hand it back for the GFV amount, leaving you in a\nbetter off position.<\/p>\n\n\n\n<p>The financier will use\nsophisticated techniques to determine the future value of your car and it will\ndepend on the age of the car at the end of the loan as well as the number of\nkilometres it will have travelled.<\/p>\n\n\n\n<p>The younger the car and less\nkilometres it has then the higher the GFV amount will be. The older the car and\nmore kilometres it has then the lower the GFV amount will be.<\/p>\n\n\n\n<p>This means that not only do you\nget reduced repayment amounts throughout your loan, but you also have added\nsecurity that your car is guaranteed to be worth the balloon amount at the end\nof the loan. So regardless of what happens in the car market, or the broader\neconomy in general, you are protected from fluctuations in car values.<\/p>\n\n\n\n<p>In the past few years many brands\nhave launched GFV loan programs including Toyota, Lexus, Volkswagen, Audi,\nSkoda, BMW, Mercedes-Benz, Volvo, Holden, Jaguar, Land Rover and Hyundai.<\/p>\n\n\n\n<p>Over the next few years many more\nbrands are scheduled to release their own programs as well, as GFV lending\nproducts have shown to be incredibly popular in overseas markets due to their\ncustomer benefits.<\/p>\n\n\n\n<p>Like a car lease, there are generally\nconditions like early termination fees, kilometre usage fees and vehicle\ncondition charges that also apply. However, unlike a car lease you will have\nownership of the car from the very beginning.<\/p>\n\n\n\n<p>Using GFV means you are generally\npaying for the usage of the car throughout the loan so making sure you\nunderstand how much you\u2019ll use the car is important to ensure you aren\u2019t left\npaying additional fees. Financiers generally provide loan terms of 2 to 5 years\nfor GFV loans.<\/p>\n\n\n\n<p>While most GFV loans are only restricted\nto new cars, there are several brands such as Toyota who now provide it for\nused cars as well. This can be an attractive option for people who like to have\na different car every 3 to 5 years, making sure they keep up with all the new\ntechnology and safety features that are being rolled out in cars every day.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How to\nchoose what\u2019s best for you<\/strong><\/h2>\n\n\n\n<p>There\u2019s no clear answer as everyone has different circumstances. However, being as informed as possible on all the different options available can help in deciding what is best for you when it comes to purchasing your next car.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Have you\nused any of the above finance options? Comment below on what worked best (or\ndidn\u2019t work best) for you.<\/h4>\n\n\n\n<p><strong>Disclaimer:&nbsp;<\/strong>This is a general information\nservice only and we do not provide advice or take into account your personal\ncircumstances, financial situation or needs. Please seek professional advice\nwith regards to how any of the material on this website can impact your own\nfinancial situation. Prices People Pay is not liable for any loss caused,\nwhether due to negligence or otherwise arising from the use of, or reliance on,\nthe information provided directly or indirectly, by use of this website.<\/p>\n","excerpt":"\nThe Coronavirus pandemic continues to wreak havoc around the world, causing people to re-think the way they conduct their lives.\n\n\n\nThis is no different in Australia.\n\n\n\nWith \u2026","category":"Tips and Guides","link":"https:\/\/pricespeoplepay.com.au\/blog\/how-should-you-finance-your-car-in-2021\/","image":"https:\/\/pricespeoplepay.com.au\/blog\/wp-content\/uploads\/2019\/11\/auto-financing-2157347_1920-1024x683.jpg","author":"Tanim Ahmed","categories_list":"<a href=\"https:\/\/pricespeoplepay.com.au\/blog\/category\/tips-guides\/\" rel=\"category tag\">Tips and Guides<\/a>"}