Welcome to our free educational course on car loans! We're excited to guide you through the process of buying your next car or other vehicle.
Today's learning objectives are:
Understand what a car loan is and how it works
Learn the basic features and what to look for
Learn how to determine your borrowing power
What is a car or vehicle loan?
A car loan is a type of secured personal loan used specifically to purchase a car or other vehicle. The duration of a car loan is generally two to seven years, often finishing with a "balloon" or residual payment at the end.
What are the basic features of a car loan?
Balloon payment
A balloon payment (also known as a 'residual payment') is a common car loan feature. It is a lump sum that the borrower pays at the end of the loan period, or sooner if the loan is paid out in full before the full term. The benefit of a balloon payment is that it can help to lower your monthly repayments. How? Because interest is calculated on your loan balance minus the final balloon payment. The potential downside is that you have to make sure that you set aside enough money to cover it.
Secured loan
With a car loan, the vehicle is used as collateral to secure the loan. Compared with unsecured lending, using the vehicle as security generally lowers the loan interest rate because it protects the lender from risk. How? If you were to stop making your loan payments, the lender could repossess (take ownership) of the vehicle to recoup their losses.
Fixed vs. Variable Rates
When you apply for a car loan, you have the option to choose between a fixed or variable interest rate. A fixed interest rate never changes, meaning your repayments remain the same for the life of the loan. A variable rate, on the other hand, rises and falls with the market interest rate. There are pros and cons to both options. A fixed rate can provide you with predictable monthly payments. However, if official interest rates were to fall, you would miss out on any savings.
How to determine your borrowing power?
Many factors may influence how much you can borrow. Some of them are:
Income
Your regular earnings are the primary factor that determines how much you can borrow. A stable and sufficient income ensures that you can meet your monthly loan repayments without financial strain.
Expenses
Lenders will assess your monthly obligations, such as rent, utilities, and other debts, to determine your disposable income. Lower expenses relative to your income increase your borrowing capacity.
Credit History
Your credit score and repayment history play a significant role. A higher credit score can lead to better loan terms and interest rates because it indicates a lower risk to lenders. Learn more here.
Existing Debts
Current loans, including credit cards and buy-now-pay-later accounts, can affect your borrowing power—even accounts with a zero balance. Lenders consider your debt-to-income ratio to ensure you can handle additional debt without financial stress.
Do you have questions? Reach out to our experts for personalised help at any time. We're here to get you a great loan!
Got questions? Call and talk with a lending expert on (02) 8313-8400 or request a call back.
Comments