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The recipe for a car loan that meets your budget

Posted on 13 February 2017

The recipe for a car loan that meets your budget

If you have had a great Christmas then you may be noticing that your finances need some attention as you start the New Year. Buying a car with a car loan can be better managed within your budget if you take some time to understand how a car loan works. Then you can set up a car loan that meets your needs and your budget.

Get a handle on your car loan budget

Setting your repayment level and loan amount should really be governed by how much money you have to play with. You can work this out by calculating your monthly costs and subtracting them from your monthly income. The remainder is your available funds that can be used to cover repayments costs and any new car running costs that may exist on top of your existing budget.

Understanding your car loan repayments

Your repayments are the way that you pay back your loan. Each repayment contains a combination of principle (the amount you originally borrowed) and interest (the amount your provider charges you to borrow the money).

The higher your repayment amount the faster you will pay off the principle and the overall loan. The faster you pay off the overall loan the less you pay in interest.

The impact of your car loan term

The term of your car loan is the length that you take out the loan for. Usually this is in months and can range from 12 to 48 months or more. If you want to borrow a large amount of money, it’s often necessary to opt for a longer term on your car loan to make it affordable. It’s important to remember that the longer the car loan term the more you will pay in interest.

Understanding your car loan interest rate

The interest rate you pay on your car loan is often perceived to be one of the most important deciding factors. Realistically a small variance in interest rate can have less impact than paying your car loan off faster.

It’s important to understand how interest rates are calculated and applied so that you can work out how to keep your costs down. The interest is calculated based upon how much of the original loan amount you owe. If you pay off the principle quickly your interest will go down quickly as well. If you opt for smaller payments the interest will be calculated on more of the original principle so you will pay more in interest.

Let’s take a look at some examples so you can understand how each element works.

On a car loan of $10,000 for a term of 24 months, the monthly repayments are $489.63. This is based on a fixed interest rate of 16%, and means that over the life or term of the loan you would pay $1751.12 in interest.

Option 1: Reduce your repayments

If you’re struggling with fitting such high repayments into your budget you can reduce them by increasing the life of your loan to 48 months. This would reduce the monthly repayment to $283.40. The interest cost* would then increase to $3603.20.

Option 2: Adjust your car loan term

Perhaps you feel that you would like to pay your loan off sooner and reduce the interest cost. Moving from 24 months to 12 months would reduce your interest costs* from $1751.12 to $887.72. It would also increase your monthly repayments to $907.31.

Option 3: Negotiate the best interest rate

You can bring your costs down with the best interest rate, but its impact is a lot lower than reducing the life of the loan or increasing repayments. For example: bringing your interest rate down from 16% to 14% will reduce your interest costs from $1751.12 to $1523.12.
*Based on a fixed annual interest rate of 16%

However you choose to structure you car loan, it’s important that you can afford to pay it off without finding yourself short of cash. If you would like help finding the best car loan for your situation, call the team at Enterprise Cars. We’re experts in providing great service and even better car loans.