AA Motoring Buyers' Guide: Take care with your car loan
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Q: Should I buy a car using finance or is it better to wait and save for one?
Not that long ago, obtaining finance was difficult. These days there are finance deals available for just about everybody regardless of their circumstances.The offers can be bewildering and a lot sound too good to be true – which means they probably are.
If your circumstances are a little challenging, some companies will still provide finance, but you’ll likely pay higher fees and interest rates.
There are many arguments against the tactics used by some finance companies, but ultimately it’s a personal choice on whether you decide to go down this route.
Mazda MPV. Picture/Whanganui Chronicle
Parents with children who don’t have much money saved could maybe afford a few thousand dollars for a 1989 Mazda Bongo. It would probably be costly to maintain, unreliable and unsafe.
So with children to think about, is this the best solution? Would their money be better spent as a deposit on a late model people mover for about $10,000, such as a Honda Odyssey or Mazda MPV?
It makes sense for some first-time buyers — particularly those who are younger — to buy a newer car using finance. Younger drivers often don’t have the cash upfront and if they need a car to get them to and from work, waiting and saving for several months until they can afford to buy a car isn’t a viable option.
In the past there were stricter finance rules, which limited consumers’ options. Now things have changed, so it’s important to look at all the factors to reach a sound decision.
If you don’t have the cash, but have a good credit history, a bank loan might be a good option. Interest rates are relatively low at the moment and if you already have a loan set up, you might be able to extend it and save on setup fees. However, be careful. The average car loan is paid off in 36 months, but adding to your home loan balance can stretch your payments over decades, which will cost you more in interest payments.
Try to be disciplined and pay off your car loan in the shortest period possible.
About 60 to 70 per cent of all vehicles sold in New Zealand have been bought with some kind of borrowing. Choose a reputable finance company and shop around. Always ask questions first to work out what the setup and cancellation fees will be, and check if there will be additional charges to make changes to your plan.
Remember, putting more money into a deposit on your car will generally save you from higher interest costs in the long run regardless of which company you borrow from. Something to bear in mind is that having pre-approved finance will give you a better bargaining ability, but ultimately, with any borrowing it is crucial to be disciplined, keep on top of payments and stick to the terms of your contract.
Saving is the sensible option, but we all know that it can often be easier said than done – especially when unexpected expenses hit us. Time is also important. The dream car of your 20s might not be at the top of your wish list when you’re in your 40s and can afford it. But, if your goal isn’t too far away and you are in a position to wait several months, then saving might be your best option.
Saving is never easy but you can make things easier by having a goal that’s achievable within a reasonable period of time. Even putting a small amount of money away each week can make a difference.
There’s no right or wrong answer. The choice comes down to what is the best option for you, which can be determined only after you’ve done your homework. Look into how much you can save or search the market for finance options.