Owning a car is a costly business, especially if you need help with financing it. In a perfect world, it would be best to save up to purchase your vehicle – after all there is no greater way to burn through cash than borrowing money to purchase a depreciating asset. The reality is sometimes you don’t have a choice. Work commitments and a lack of other transport options can leave you forced to purchase a vehicle whether you’re ready or not.

So, what types of financing is available to you to use?

Credit Card

Financing your purchase by using a credit card can actually be a good option, particularly if you are purchasing a car valued at less that $5K (the general car loan minimum). Some lenders offer a low introductory rate (lower than a car loan) so if you can make the repayments within this time frame it could be a worthwhile option. Some lenders also offer 24 months interest free on balance transfers. Do your homework BEFORE you go out shopping read the fine print to make sure your plan is realistic. Failure to make repayments on time can be catastrophic for your financials, especially with credit card rates nudging towards 20%p.a. Also beware that some car dealers won’t accept credit cards, and card transaction fees will apply. Don’t be swayed by points – studies have shown they’re rarely worth the annual fee.

Personal Loans/Car Loans

This can be arranged through your banking/building society and can be unsecured or secured against an asset such as the vehicle itself. The interest rate will be higher than a mortgage as security will be either non- existent or on an asset that loses its value. When organizing finance always consider whether you are looking for a fixed rate (which locks in the interest rate you will be paying) or a variable rate that may move with the market. Don’t just consider interest rates when making your decision. The ability to repay early can be important and some loans may penalise you for this.

Dealer Financing

Sometimes dealers offer finance and will make the application process seamless in order to make the sale and get the car off the lot. Loans tend to be offered for 1-5 years, and unlike some other loan options, additional repayments do not reduce the overall loan + interest calculation. This means if you pay the loan off in 4 years (instead of the agreed 5) you are still liable for financing the entire amount calculated when the loan was offered. It’s also not unheard of for a dealer to mark up the price of a car to account for a low interest rate. In the excitement of the purchase, it’s easy to forget about the details! Our recommendation is to understand your other options and how much they will cost you, so if the dealer does offer finance you are in a position to compare the offer and make an educated decision.

Mortgage Refinancing/Redraw

Having available equity in an existing asset can be one of the most affordable options to consider, especially as home loan interest rates are traditionally lower than car/personal loan. You also won’t be penalised for making additional repayments in order to pay down the loan sooner. If you opt to refinance, your lender needs to look at your property to determine what additional funds you can access. This incurs a fee. If you’re redrawing it’s likely you won’t incur an additional fee as the nature of the loan is flexible.

Novated Lease

This is basically a three-way agreement between you, your employer and a finance company. Ownership doesn’t change hands and you simply pay a monthly fee to ‘rent’ the use of the vehicle (although there are lease-to-buy options). Your payments are salary sacrificed pre=tax, which can work for you depending on what your income is. If structured intelligently, the calculated payments can also cover running costs of the vehicle, such as registration, servicing, and insurance. At the end of the lease you hand back the keys and decide what to do next. It’s definitely a worthwhile option to consider if you would use your car a lot and can benefit from the tax incentive.

As always, you need to do some homework on these options, and consider your financial situation and repayment abilities. There’s some good calculators available online (www.canstar.com.au, www.moneysmart.gov.au) to help you in this process. Owning a new car can be fun, as long as the financials work for you.

If you’re trying to identify the best way to structure your finances and manage debt, you don’t need to do it alone. A financial adviser (or planner) spends their days identifying and presenting opportunities to their clients. Our simple, quick, free service will connect you to the best independent financial advisers, based on your needs. Click here to get started.

The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a financial adviser or other finance professional.

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