[ad_1]
The term of your car loan is what dictates how much you’re required to pay. Here’s how to choose the right term for you.
Doing your homework when searching for the best car loan can literally save you thousands in interest.
RELATED: The documents you need to apply for a car loan
RELATED: Does novated leasing save you money?
Before you even start shopping for your next car, make sure you get your loan sorted first.
That way, you will be in a stronger negotiation position because you will know exactly how much you’ve got in your budget, how much interest you’re paying on the loan and, finally, you’ll know how much your repayments will be.
Selecting a loan
According to Finder’s Consumer Sentiment Tracker, Australians carry approximately $11,987 on their car loan. Generation X are the most indebted, owing on average $17,244 on a car loan to their lender.
Finder’s research also found that the majority of car loan customers (60 per cent) feel they’re getting good value for money on their current car loan, while 25 per cent feel they could get a better deal elsewhere.
The loan term
Once you’ve picked a lender that works for you and opted for either a fixed or variable loan, you’re going to need to look at the terms of the loan.
The loan term refers to the duration of the loan, which tells you how long you have to pay the amount due back to the lender.
The term of the loan is an important decision. That’s because the length of time that it takes to repay the loan will impact how much you pay in interest.
As Moneysmart explains, shorter terms often have lower interest rates, while longer terms usually mean lower repayments. However, you will end up paying more in interest.
The loan term will form part of your loan contract or agreement, where it explains the payment frequency, which is usually weekly or fortnightly for a specific number of months.
What’s a standard loan term?
In Australia, the most popular term length for a car loan is five years, but you can get a loan for just a year or two, according to car loan statistics compiled by HouseGrail.
The site also reveals the average car payment in Australia is $591 a month, which is a lot of money lost from the monthly budget.
What does the loan term impact?
Your loan term will impact the amount of interest you pay over the course of the loan, as well as the cost of your monthly repayments.
Car finance provider Savvy explains that while longer-term loans may have lower repayments, they might not be cheaper in the long run.
Meanwhile, shorter-term car loans may look like they have higher monthly repayments, but they will likely attract less interest – meaning you’re ultimately paying less in total.
Typically, the average interest rate on a car loan is set at almost five per cent, but could be as high as 17 per cent, depending on the lender.
The interest rate offered to you can also vary depending on your credit score, your financial situation and the type of car you want to finance, according to Savvy.
| Loan term | Monthly repayments | Total interest paid at 12 per cent | Total amount paid |
| 7 years | $617.85 | $16,899.03 | $51,899.03 |
| 5 years | $778.56 | $11,713.34 | $46,713.34 |
| 3 years | $1162.50 | $6850.03 | $41,850.03 |
Source: Savvy
How do I decide which car loan term is best?
There’s no simple answer here.
You will need to compare loans to understand all of the fees and interest rates that apply and read the fine print.
Also, bear in mind that the lowest interest rate may not end up being the cheapest, because most car loans are marketed with base interest rates that don’t include most fees and charges that you will need to pay on top of your principal.
Sometimes, these lower interest rates also require you to put your new car up as security or collateral. Known as a secured car loan, this means that the lender can seize the car and sell it if you default on your loan repayments.
When shopping around, comparison websites can be helpful, but Moneysmart warns consumers to remember that they are businesses and may make money through promoted links, and may not cover all of your options.
Take your time, and don’t be rushed into signing on the dotted line until you’ve done your homework.
Happy driving.
The post Which car loan term is best? appeared first on Drive.
[ad_2]
Source link
