Choosing the right loan

So you’ve looked around and found the perfect car – your vehicle soul mate. You’re all ready to buy, but your savings account isn’t as healthy as you’d like it to be, and you haven’t recently won the lottery.

Loans can be difficult to get your head around at first, so we’ve tried to make it a little easier for you.

When considering how much you’ll need to borrow, it’s important you think about what your car will actually cost you. Aside from your loan repayments, you’ll need to budget for:
  • fuel
  • servicing
  • insurance
Add onto this your other living expenses like rent, food, entertainment and bills, and you’ll have a much clearer idea of what you can afford to pay each week on your loan. Websites like moneysmart.gov.au have some fantastic budgeting tools to make this process much easier for you.

Remember that your expenses and circumstances will change throughout the term of the loan, so it’s best to keep a little in reserve for things you may need or want to buy in the future.
Secured or unsecured?

Credit providers will offer both secured and unsecured loans. The two do differ and it is important that you know the difference.

Secured Unsecured
  • The loan is secured by an asset such as the car itself, which can be repossessed if the loan goes unpaid
  • Will generally have a lower interest rate
  • Higher chance of approval.
  • No security assets or valuable items required to secure the loan
  • Will generally have a higher interest rate
  • Lower chance of approval.

 

Fixed or variable?

A fixed interest rate loan is where the interest rate does not change for the period of the loan. This means your regular repayments will stay the same for the entirety of the loan.

A variable interest rate loan means the interest rate may change throughout the period of the loan. This means it may drop, and your repayments will become cheaper. However, it also means that it could rise, and therefore your repayments could become more expensive.

Always be careful! The lowest interest rate may not necessarily mean the lowest repayment. Always check to see if the loan has hidden or additional charges, making your loan more expensive.

In addition to making sure that you are over 18 years of age, credit providers legally have to ensure you aren’t borrowing more than you can afford. To help them with this, they’ll generally ask for the following information:
  • if you have a job and how long you have been employed
  • how much you earn
  • terms of your employment (eg casual, full time)
  • other living expenses (eg rent, mobile phone plan, groceries)
  • if you have other debt (credit cards or other loans). If yes, what for and how much is owing?

They will also take into account the following factors for a loan application:
  • whether you have paid other loans on time
  • valuable possessions, such as a car, that you own (if applying for a secured loan)
  • if you have any savings history
  • how much you will be initially depositing onto the loan.
To help them know if you have had any problems paying previous loans, credit providers will refer to your credit report.
For more information on loans visit RACQ Bank, or check out moneysmart.gov.au