Car financing – what you need to consider

How do you find the right lender?

Just because you bank with a particular lender, doesn’t mean that they can provide you with the best rate and terms in the market. Just like insurance, it is best to look around and source quotes from multiple lenders.

Look for:

• Good web presence – search engine rankings are a good place to start
• Read testimonials and ask around – testimonials can be a true indicator of how good a lender is to deal with.
• Simple language – do you understand what they are offering and is the terminology easy to understand?
• Honest and open communication and eagerness to help – how comfortable do you feel with the responses you have been provided?

The associated fees

The fees and repayment schedule should be listed and set out in full on your quote or documentation. If these key items are missing, ask for them and question the lender on why they are missing. Do not sign anything which does not have full disclosure of fees.

Early pay out of loan

Some lenders have termination fees associated with an early pay out of the loan. Be sure to ask your lender if there are any pay out fees and have the lending agent document this figure on the loan contract. You might not currently be in a position to pay out the loan quicker but your situation may change in the future where this might become a possibility. It is important to find out all of the answers to future scenarios before signing on the dotted line.

Another important question to have answered is, what interest will be charged if the loan is paid out early? Asking this question could save you thousands in the long run. Bare in mind that in some cases paying a more expensive finance agreement allows you to pay out the loan early without the remainder of the interest owed. Whereas a cheaper finance agreement may require you to pay out the total interest of the loan, and you end up worse off under the cheaper arrangement. Your lender should be able to provide you with a breakdown so that you can make an informed decision for which option to go with.

The effective rate (the REAL interest rate)

Don’t be fooled by a cheap interest rate, lenders do not have to disclose to you how much they receive on commission, monthly account keeping fees and any other fees associated in your finance agreement, so chances are your interest rate is actually significantly higher.

To determine the effective rate:
Take the purchase price, less any deposit and trade in amount, plus the payout figure (if applicable). This is the change over amount and also the amount to be financed, not including any lender fees.

then:
Take the monthly repayment, term and the residual at the end of the term and plug these key factors into a finance calculator, this should tell you the effective rate that you are actually paying, inclusive of fees for the vehicle you are buying.

The most important thing

Get all of the answers to your questions in writing, this not only makes your lender accountable but covers you if an issue arises and the information is contradictory to what you were originally told.