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Set up your car loan for success with a good deposit

Posted on 10 February 2017

Set up your car loan for success with a good deposit.

If you’re looking for a new set of wheels you may be contemplating your financial position. New cars don’t come cheap, so you’re probably wondering how you are going to pay for it. Here are some smart ways to approach your next car purchase.

Start with a deposit

A great starting point for setting up a car loan is to gather your available funds together for a deposit. Building a deposit is a good way to reduce the amount you need to borrow and increase the amount of the car you own.

Car loan providers will be much happier about the risks of lending to you if you have already invested a deposit in your vehicle. That means there is more value available should anything go wrong with your car loan. The end result is a happier finance provider and a better car loan for you.

Maximise your trade in

The greater the deposit the smaller the car loan so think now about the trade in value of your existing car. Any money you get from trade in can be added to your deposit and will allow you to borrow less.

Focus on getting your car in good working order and making sure that it’s clean both inside and out. There’s not much value in carrying out extensive repairs because the dealer you sell to can probably do that cheaper than your mechanic. Cosmetic problems that can be fixed quickly are worth giving some attention.

If your trade in is only going to happen after you buy your new car, you should still be able to plan for the amount of money you will get back. This will help you work out the size of loan you need for your big purchase.

What can you afford to borrow?

Use your deposit and trade in money as a starting point and work out how much you can afford to borrow. It’s important to make sure your car loan is affordable as you will have to commit to making regular repayments on the loan. Failing to meet these commitments could affect your credit record and increase your costs.

You can calculate what repayment level is affordable by totaling all your income and deducting all your day-to-day and household expenses. Don’t forget to include estimated running costs for your new car - especially if you’re upgrading to a larger model or a car that might have higher maintenance costs.

Now you can work out size of car loan you can afford.

How should you structure your loan?

Circumstances do change, and the longer your car loan term is, the more likely you will need to adjust its structure. Here are some things to consider when setting up your car loan.

Should you choose flexibility?

In all likelihood you’ve probably put all your spare cash into your deposit, but your financial position could change over the life of your loan. If you have fluctuating income levels, annual bonus payments or any other likely movement in income, you might consider a flexible repayment option.

Most loan providers will set up your loan so that you can’t increase repayments or pay a lump sum over the course of the loan. Paying off your loan sooner means you pay less interest which reduces the money that your loan provider will make from doing business with you.

If you want to take the opportunity to pay off more, faster, when the money is available, you will need to structure your loan accordingly. Being upfront about these requirements stops you facing early repayment charges at a later stage.

Keep it simple

If your car loan is for a shorter term or you know your income is not going to change, you might choose to forgo the flexibility. Keeping your loan repayments the same for the life of the loan may allow you to negotiate a lower interest rate that will benefit you for longer.

Getting the best deal with your car loan is all about you negotiating a package that suits you and your financial position. Being able to contribute to the cost of your car with a good deposit both reduces your loan requirement and makes your finance provider happier about lending to you. Then you can focus on repaying your loan and enjoy driving everywhere in your new set of wheels.