For most Australians, purchasing a new car isn’t something one can do outright. You either need to save for many years – which means taking public transport or sharing a car in the interim – or taking out a car loan. According to ASIC MoneySmart, 59% of those who purchase new cars take out some kind of car finance.
How can you get a better deal on car finance considering these new statistics?
Having a substantial deposit
Having a deposit when buying your car means you have “skin in the game.” That means you are taking on more of the risk instead of the lender. For example, a lender may approve a loan without a deposit for $25,000 at 11% p.a. Over five years, you will have paid $8,214 in interest and fees (assuming a $10 monthly fee.)
If you purchase the same car with a $5,000 deposit, a lender may see this as a lower risk and give you a lower interest rate in return. This means a $20,000 loan will attract $6,393 in interest – which means you’re $293 better off compared with having the same interest rate as the previous loan.
Trade-ins and selling your old car
ASIC also says the average loan amount is $18,409 – yet the average car purchase cost is $27,994. This doesn’t mean most Australians have an average of $10,000 deposit lying around; people also use trade-ins or sell their old cars to put toward new cars.
This acts as another type of deposit, which can go a long way in reducing your loan amount and overall interest rate.
Get car loan pre-approval
Looking at the statistics above, this means we’re in a buyer’s market. Dealers must work extra hard to persuade people into buying. Having an “ace” in negotiation can net you a great deal. This is where car loan pre-approval comes into play.
Car loan pre-approval is an effective “green light” to purchase a car and guarantee that money will come through once you buy. The pre-approval gives you a “price ceiling” and places confidence in the buyer. Car loan pre-approval is a proven method of paying less for your car by strengthening your negotiation power. If you approach dealers at the end of the month and buy cars already on the factory floor, you might knock a substantial sum off the list price of your car. Remember: salespeople have quotas to fill and a buyers’ market makes it that much harder for them; but easier on your pocket.
Avoid “0%” traps
Zero-percent finance looks good; but may end up costing you more. The 0%p.a. rate does not include fees and charges; these “deals” often mean forgoing negotiation so you can get a better price. As we seem to be in a buyer’s market, this makes less sense than getting car loan pre-approval or even a conventional car loan.
Remember to consult a financial professional before making any major financial decision.