Apart from your home, a car is one of the biggest single purchases you’re ever likely to make. If you don’t
have the cash to pay for it upfront, you’ll need to borrow money. And, depending on the type of car you
choose, you could be paying off your loan for some time. So don’t let the thrill of owning a car get in the
way of making good financial decisions.
How do car loans work?
A car loan is a personal loan for the specific purpose of buying a new or used car. You borrow an
amount of money that you agree to repay within a certain period of time (called the term). This can
vary, but is usually 12 months to 5 years. You will have to sign a credit contract which will specify the
amount borrowed and how you will repay it.
You pay interest on the amount you borrow, which may be at a fixed rate (where the interest rate is
locked in for the term) or a variable rate (where the rate may go up or down over the term), plus any
fees and charges. While a fixed rate loan offers the benefit of set repayments, if you want to make
extra payments from time to time, you will usually have to pay an additional fee – so think about what
options are most important to you.
A car loan may be secured or unsecured, depending on whether you put up your car (or other asset)
as security for the loan. With a secured loan, you usually pay a lower interest rate than for other kinds
of lending – but it also means that if you fall seriously behind on your repayments, your credit provider
has the right to sell your car (or other asset) to get their money back. Secured loans are usually only
available for newer cars, because they are more valuable as an asset. With an unsecured loan, you do
not need to mortgage your car as security, but you will likely pay a higher rate of interest because the
credit provider is taking a bigger risk.
If you buy from a car yard, the car dealer might offer to arrange finance for you. While dealer finance
might seem more convenient, it’s usually cheaper to get a loan elsewher