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Handy hints when taking out a Car Loan Car Leasing - the Pros & Cons

Cars are best financed using a secured car loan or with security over other assets you own because the interest rates on secured finance are generally a lot lower than for a personal unsecured loan.

If you have a line-of-credit mortgage or a re-draw facility on your home loan, this would be the first option that you would consider to finance your car purchase because home loan interest rates are typically the lowest of all.

This strategy alone could save you 4 to 6 per cent over a secured car loan and 10 per cent or more on an unsecured loan.

Vehicle leasing as an option

Depending on your situation, there may be considerable tax benefits if you use leasing finance.

When you use leasing to finance a vehicle, the finance company is the owner of the vehicle and you have possession of the car under your lease agreement for a set term.

At the end of the lease term, you are able to purchase the vehicle from the financier for the 'residual', an amount agreed to in your lease contract and could be anywhere from $1 to 50% or more of the amount originally financed.

The higher the residual, the lower the monthly payments and vice-versa.

Whilst you may be able to reduce your repayments dramatically by choosing a high residual, you should be mindful of the risk that, if your residual amount is higher than the value of the vehicle at the end of the lease, you may find yourself being forced to either buy the car above the then market value or having to sell it and make up the difference out of your own pocket.

Keep the story straight

Be completely open and honest with your broker or lender about why you need the finance.

You should also thoroughly and accurately disclose your financial position.

There are a lot of different ways to finance a car and, with a full understanding of your situation, they may be in a better position to offer a product more appropriate to your needs.

Car loans outside the box

If you are struggling to get finance from traditional lenders due to your employment history, residency status or a poor credit file, there are plenty of alternatives.

There is a considerable number of private and non-bank lenders offering 'low doc' loans, bad credit loans, etc. These can be best sourced through a finance broker.

You will definitely pay higher interest on these loans but, if you ensure that you meet all of your repayment commitments on the loan, you will establish your credit-worthiness for next time you need a loan.

Keeping your lender honest

Somewhere around one in three people who take out a loan wind up overpaying their commitment due to mistakes made on their loan statement.

These errors can come about due to things as simple as the application of the incorrect interest rate or additional interest being accrued because of delays in the lender allocating your repayment/s to your loan account.

You should check carefully each statement that you receive from your lender and report any anomalies to them immediately.

There are some great software packages around designed to help you monitor and manage your loan and other bank statements, making the job of uncovering bank errors easy.

Alternative lenders

Don't forget that there are more options around than the mainstream financial institutions.

Community based banks, micro lenders, credit unions and small finance companies can all offer very competitive rates and may be more personable to deal with.

Bundle and save

Some financial institutions, particularly larger banks and building societies, offer interest rate discounts for customers who have other loans or financial products with that institution.

By bundling together a banking package to incorporate your cheque/savings account, a credit card, your home loan, car loan ... even insurance policies, the financial institution can pass on their significant savings to you.

Whilst these potential savings can be very attractive, you should be very careful about changing insurance policies from one institution to another just to qualify for a better deal on your car loan.

You should ensure that the policy you are switching to is in every way as good as what you are switching from, otherwise you are putting yourself at financial risk without due cause.

What about the car dealer?

It is likely that, when buying a new or used car, you will be offered finance by the dealer.

Whilst having everything taken care of at the dealership may be very convenient, it is less likely that you will get any real options - meaning that you are unlikely to get the best deal.

Make sure that you shop around before you sign up - either yourself or using a broker.

Get it right the first time

Some people make the mistake of submitting loan applications to multiple lenders in the pursuit of a loan.

Online lenders make this very easy.

However, every time that you apply for a loan, the lender does a credit check and, the fact that they did a credit check on you it is recorded on the credit reporting agencies' files.

The more applications that you make, the more credit checks are recorded and the more desperate you appear to anyone looking at the file. It will also result in the lowering of your credit rating.

If you make even a handful of enquiries in the space of a month or so you will find that getting a loan can become very difficult.

The best recommendation is to talk to a finance broker about your situation before you start allowing anyone to access your credit file.

A broker can assess your situation and better ensure that your application is submitted to the right lender first time around.

Compare apples with apples

Finance companies are required by law to use "comparison" rates when advertising their loan products.

The reasoning behind this is that it makes it easier for the consumer to compare the total cost of one loan to another.

But remember that these comparison rates only allow you to compare the total interest and fees that apply to a loan - they offer no information about the suitability of the particular products to your specific circumstances, they don't make comparisons of penalty fees and they don't take into consideration the considerable differences in features that may exist from one loan to the next.

Get your act together

Before you apply for a loan, there are a few things that you might need to supply to the lender, so you should make sure that they are ready in advance.

The required documentation will be different depending on the type of loan and whether you are self-employed.

If you are an employee seeking a loan for personal finance, for example, you will most likely need:

• proof of identity
• verification of your more recent employment history
• proof of income (pay slips and/or personal tax returns)

A self-employed person or business owner seeking finance for commercial purposes may also be required to supply:

• profit and loss statements
• business balance sheet
• tax returns for the business
  
• a business plan
• future cash-flow forecasts.

What about a credit card?

Whilst credit cards have a higher interest rate than many of the other car finance options discussed, it's generally much less hassle to get one and they afford more flexibility when it comes to how you repay the money.

Keeping account

If you have a dispute of any sort with your lender, you may need copies of documents including your initial application, payment receipts (including online ATM or Bpay transactions).

It is likely that the financier will charge a fee to provide copies of this type of documentation - so it's important that you maintain accurate records of all your transactions and communications in relation to your loan.