What loan term should you choose when it comes to car loan?

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, updated on August 4th, 2023       

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What loan term should you choose when it comes to car loan?

Not many people are able to pay for a car in cash. Which is why most Australians choose to finance a car through a loan that will give them that financial boost they need to help them move around conveniently. The loan term that you choose can either make or break the overall amount you will have to pay on the car. Here are four things you need to consider when taking out a car loan.

What will suit your financial circumstance?

Before you go on a search to finding a car loan to finance a car, checking to see if it within your financial reach is important. Australian’s borrowed $16 billion to purchase new and used cars in the previous year. Car loans are based on the type of car that you choose, which also means you need to check the price tag that comes with it. The amount that you will borrow will influence the interest rate along with the monthly repayments you will have to meet. Therefore, it will be best to find something that suits you.

Keep in mind that a car depreciates

Choosing between a long loan term and a short loan term will be one of the things you will have to consider when getting a loan. To make your decision easier, always keep in mind that a car is a depreciating asset which can lose up to 45% within the first three years of ownership. You will want to consider something that is financially savvy. A short-term loan can come with slightly higher rates, but it can help you pay off your car quicker, while a long-term can end up costing you more.

Compare interest rates over the term of a loan

The interest rate is one of the most common things that people check when taking out a loan. Most car loans come at a fixed rate which means that you can expect no changes in the loan’s rate until you complete the repayments. Using tools such as online calculators can help you know how much the same loan will cost you over various terms. For example, if you take out a car loan of $30,000 that comes at a comparison rate of 8.10% for:

2 yearsYour monthly repayments would be $1,358, and at the end of two years you would have paid $32,592
3 yearsYour monthly repayments would be $941, and at the end of the three years you would have paid $33,876
4 yearsYour monthly repayments would be $734, and at the end of the four years you would have paid $35,232

Keep an eye out for fees and charges

Some expenses can be avoided if you pay attention to the finer details that come with a contract. The comparison rate, which is expressed as a percentage tends to be slightly higher than the interest rate because of the additional costs such as fees and charges that come with it, should be something you need to keep your eyes out for. This usually encompasses the true cost of a loan throughout its term.

What you could also consider is the flexibility of your loan features such as being able to pay out the loan early if you are able to. A rule of thumb is to avoid a vehicle that can cost you more in car loan payments. If you are unable to meet more than the minimum payments of a loan despite having compared across various lenders, perhaps you will need to consider a cheaper car.

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