A guide to structuring your car loan

02 February 2017 Learning Centre

A guide to structuring your car loan

A guide to structuring your car loan

If you’re in the market for a new car, then you’re probably in the market for a car loan. Many car buyers use car loans to give them access to the cash they need to fund their next purchase. The challenge is working out what you can afford to borrow and how quickly you can afford to repay your loan.

If you’re about to set up a car loan, then read on. This guide to structuring your car loan is packed full of tips to help you: work out how to set your budget; maximise your repayments; and be prepared before you go to purchase your next car.

Finance first

If your old car is ready to say goodbye or you’re ready to say goodbye to your old car, then you’re probably already thinking about what kind of car you would like next. Or perhaps you haven’t owned a car before and this will be your first purchase. Maybe you just like to keep your car new and it’s time for a change.

Whatever the reason for your next purchase, try to think finance before you start shopping around. It’s easy to fall in love with a car because it’s going to be a good ride, but then you may find yourself struggling to afford a loan that is outside your budget.

Work out your budget

Working out how much you can afford to borrow for your car will give you some parameters to shop within. There are two different numbers at play here - how much you can afford to borrow and how much a car loan provider will lend you. Calculating your own budget will help you to ensure you don’t accept a loan bigger than you can afford and struggle with repayments in the future.

Start by working out how much you can afford to repay. You can do this by reviewing your income alongside your costs. It’s important to capture everything if you want an accurate budget. Once you have identified what remains when you take away your costs from your earnings you should have an idea of what you can afford in repayments.

Deposits

If you have a deposit it will make a big difference in boosting your budget. Remember that any money you can use to pay for your car upfront reduces the amount you need to borrow. The lower the amount you need to borrow the less you will pay in interest and charges.

Review your options

Armed with your deposit and your budget calculations you will be able to get some comparative quotes from providers. This will give you an idea of how much you can borrow and how much it’s going to cost to repay.

Structure your loan to meet your needs

The faster you repay your loan the less money it will cost you. So there are a few smart things to be proactive about when you set up your borrowing. Planning for these upfront will stop you being restricted in your options going forward, and can save you money across the life of your loan.

Keep your interest down

Getting quotes from different providers will help you choose the lowest interest rates. But remember to check all costs - there could be fees and charges that make the best rate more expensive in the long run.

If you have a poor credit record you may find you’re facing a higher interest rate. Check your credit record before you apply so you can prepare yourself for any challenges (find out how here [linkto: blog on credit record]). Be sure to set up a review date after you are more than 12 months into your loan as regular repayments on time could allow you to negotiate a lower rate further down the road.

Stay flexible

Setting a budget up front is important to allow you to be realistic with your repayments. However, it’s important to remember that your financial position will probably change over the life of your loan. Consider your repayment flexibility and whether you want to be able to make additional lump sum payments or increase the size of your regular payments. Many providers will restrict your ability to do this unless you build it into your car loan.

Repay as often as you can

If your pay is weekly or fortnightly, you might consider increasing your repayments from monthly to every two weeks. Do this by taking the quoted monthly repayment and splitting it into two, and you will find that you end up paying an additional month of repayments every 12 months of your loan.

The result? This simple restructure before you start paying could take five months off a five year loan. That’s a considerable saving in interest and will mean you get access to your cash sooner to begin saving or spending on your next project.

Having worked out what you can afford and what you can borrow, you’re ready to start shopping for a car. Staying flexible to your changing budget is an important way to stay on top of your car loan costs and speed up repayment. Once your car loan is set up you can schedule in an annual health-check to help you stay focused on paying it off even faster.