How to finance your car

The problem is the very large sum of money between you and the car and you think it's an impossible target.

Think again. There are dozens of financiers on call to make that car come home with you - but you need to know what's available, what's required and more importantly, what it's going to cost.

Gauging the size of the car loan industry can be reflected by lenders such as St George and Esanda that each write around $220 million of car loans a month. So there's money available. These are the steps to get your hands on some.

CREDIT HISTORY

The first step is your ability to repay. A car loan specialist of Yes Loans says your credit history is critical to successfully buying any car on finance.

If you have a bad credit history - a cupboard full of irregular payments, none payments and even a repossession - you have a rocky time ahead getting finance and even then, you'll go to the top of the interest rate scale.

But, they say, it's not the end of the world.

"If you pay on time for 12 months you can re-establish your credit rating and get lower interest rates," he says. "History is that - history. You can turn your credit rating around and that will make life easier and cheaper for the future."

CAR FINANCE

Financing your car - as distinct from paying with cash - is generally the quickest, easiest and most expensive way to get wheels. Recognise that and you're on your way.

National car dealership chain AHG does big business in financing its products. One of the biggest attractions is that the money business is done virtually on the spot, in the dealership office. That makes it quick and easy. It is made easier by the fact that the size of AHG allows it to offer interest rates in line with the banks - because that's generally where they get the money.

AHG writes about 1700 new and used car loans a month. A spokesperson for the group says buyers are increasingly using dealerships as a source of finance.

"Overall, there's 85 to 90 per cent approval rate for all loans," he says. "Getting finance from a dealership is just as competitive as from other lenders, plus is a significantly simpler arrangement. It means that buyers don't have to search and source funds elsewhere."

LOANS TYPES VARY

The AHG spokesperson says fixed rate loan agreements are the most common finance arranged by AHG, with about 70 per cent for individuals and 30 per cent for businesses.

They say the recent National Consumer Credit Protection Regulations - which licences financiers and monitors car dealers - had led to banks tightening their criteria on personal loans and that placed more business with the specialist car loan finance companies.

"There's more rigour in finance because of the regulations," they say. "But it has led to more finance being written by dealerships."

A spokesperson from Yes Loans says the type of finance product and the amounts being lent had changed dramatically since the GFC.

"I would say that our clients are much more price sensitive than they were two or three years ago," Yes Loans say. "The size of the loans are also down significantly. The majority of our clients are price sensitive. Most are smaller loans and the customers are buying small, inexpensive cars like Hyundai Getz."

The spokesperson says most are chattel mortgages and consumer credit loans - used to be hire purchase - which are secured on the car.

"If the customer has no credit rating, or has a poor rating and has a loan default, we can organise for an existing loan to be paid out," they say

"A loan can be tailored for borrowers on low income, or low disposable incomes. For example, the loan period can be extended so monthly repayments are smaller. That also improves the chances for the loan being approved."

A high credit rating can mean lower interest rates and therefore lower repayments. According to data from loan comparison groups such as Cannex, a low-risk, high credit rated borrower could, for example, have an interest rate of 10 per cent for a secured loan.

But if the loan is unsecured - that is, no collateral is required on the car - then the same person could pay 14 per cent. Commercial rates are lower. A low risk loan could be charged at 7.8 per cent as a base rate and yet as the risk increases, the interest rate may grow to 16 per cent.

REPAYMENT CAPACITY

Financiers use a point-score system to assist in determining repayment capacity. This can be used in conjunction with the Henderson Poverty Index that is a sliding scale taking into account marital status, income, disposable income, length of employment, number of children and so on. Buyers should be aware that used car loan rates are more expensive than new car rates.

"That's based on the car's age," Yes Loans spokesperson says. "There are other variables as well, mostly affecting insurance, such as the driver's age and driving record, type of car and so on."

Generally, a used car buyer can expect to pay 2-4 per cent more in interest rates than a new-car buyer.

CASH BUYERS

Then, for a lucky few prospective car buyers, there's cash. The Yes Loans spokesperson says there's a "true" 10 per cent of buyers who pay using cash.

"That is, not people who think cash is getting an overdraft or borrowing against equity in their homes," they say. "Cash buyers have usually saved the money, received a payout from work, for example, or have access to other sources of lump sums."

But don't think cash is king in a dealership. Mr Kininmont says the benefit of using cash is all to do with the negotiations.

"Each individual transaction is based on its merits," they say. "There is no real advantage or disadvantage in using cash for the purchase of a motor vehicle."

TIPS FROM 'Your Money'

YOUR interest rate is the key number to watch when it comes to car loans. Paying too much interest is like throwing money out the window, and we do plenty of that with new cars that depreciate as soon as we drive away with them. Current car loan interest rates range from just below 9 per cent to about 13 per cent – or more if it’s unsecured. On a $20,000 loan over five years that’s an interest cost to you of $5000 or $8000+, a big difference in these days of watching every dollar we spend.

Take the time to get two or three quotes from different lenders, and also visit consumer comparison websites such as infochoice.com.au and canstar.com.au to see the wide range of lenders and options available. Car loan interest rates are higher than your home loan rate (about 7.8 per cent among the big banks) and it makes sense the pay down your higher-interest loans first. You can save money by redirecting windfalls such as tax refunds into your car loan if the loan structure allows it, while some people finance their cars using the equity in their home loan.

Anthony Keane
'Your Money' Editor