What do you need to finance a car

Financing A Car

Buying your ideal car may not be so easy as the brand, make, or model has to suit your needs. You need to decide if you will frequent a dealer or those who sell privately. Also, you may choose to go for a second-hand or new car. More importantly, you need to know if you should finance a car.

This article will shed some light on what you need to finance a car, car financing options, and steps to apply for a car loan. It will also consider some FAQs, qualities of good car loans, and benefits from car lending specialists.

Car Financing Options

Generally, many people aim to save money while buying a new or used car. Similarly, they try to avoid running into debt when purchasing depreciating assets – like cars. Nonetheless, several people commonly use finance to buy vehicles.

Whatever loan options seem attractive, it is worthwhile to have a good understanding of car financing options.

You have several finance solutions open to you to finance a car. They include the following:

• Simply use your saving accounts – you buy it outright.

• You could apply for a personal loan or car loan.

• You could opt for dealership finance.

• Similarly, you could opt for a novated leasing agreement that involves salary sacrificing.

• There is the option of redrawing on your home loan (home loan refinance).

• You could get a hire purchase agreement.

• You could use chattel mortgages.

• Credit cards could be an option.

Savings Accounts

Now, paying in cash from your savings accounts can be a good option for car financing. But this depends on what state your personal finance is in or your financial situation. With commitment, you may be able to save enough to purchase a new car in Australia within two years.

For a car costing around $25,000 and with an average Australian income of $90,329, you could set up a bonus saver account. Then, you can contribute 20% of your monthly income to a bonus saver account. This estimated duration for saving enough for a car works when the average saving rate is around 1.06%.

Personal Loan or Car Loan

Again, you may not want to incur debt when buying depreciating assets. However, taking out a car loan or personal loan can have its advantages. For instance, it gives you instant access to a car if needed. In addition, you could improve your credit score when you make regular repayments on your personal loan.

An improved credit score can be helpful in getting a home loan or future purchases. Meanwhile, note that missed repayments or short-term multiple loan applications can have a negative impact on your credit score.

The two main types of auto loans are secured loans and unsecured loans. In the case of a secured car loan, the car you are buying is commonly used as 'collateral.' Alternatively, unsecured loans do not use the car as collateral for the lender.

Quite significantly, your choice of secured or unsecured loans impacts the interest rate a lender may give you. Similarly, your credit score may also play a role.

Dealership Finance

Walking into car dealerships with a car loan approval gives you an edge. You can negotiate freely for a car of your choice. All the same, car dealers need to make their money somewhere. As such, it could be from car dealership finances or the car's sales price.

True, dealership financing may offer lower interest rates and monthly loan payments than other secured personal loans. But there may be additional fees. Therefore, you should watch out for establishment fees and dealer agency fees. Take your time to read fine prints and carefully consider your car financing options.

Green Car Loans

Green car loans are a credit option or loan given to make an environmentally-friendly purchase. This purchase should be for an electric car or hybrid vehicle. Green car loans are an excellent option for buying your car.

All the better if lenders offer competitive interest rates for such vehicles. However, you may find a better deal when comparing car loans from various lenders. Also, you may find it worthwhile to read the fine print.

Novated Leasing Agreement

Another car financing option is a novated leasing agreement. Quite significantly, opting for salary sacrificing with a novated car lease means you are leasing the car. You do not own it. First, your employer has to agree to use your pre-tax salary to make lease repayments on a car.

Next, you or your employer chooses a finance company to take out the lease with. Ultimately, your employer is responsible for making the lease payments to the company on your behalf and pays fringe benefits tax (FBT). This implies that your employer makes car loan repayments out of your pre-tax salary.

According to the Australian Taxation Office (ATO), GST does not apply to a novated lease as it applies to other types of car purchases. Consequently, you may purchase your car at a lower price than buying it outright. Perhaps, you are wondering if taking out a novated leasing has drawbacks.

Well, there are some drawbacks. For example, the interest rates and admin fees applied may be higher. In the same vein, there may be application fees and ongoing fees. You could be liable for the vehicle upon losing or changing jobs.

Out-Of-State Car Financing

So long as the lender is licensed in that state, you shouldn't have issues with financing a car in a different state. However, you could incur extra fees when buying a car in a different state.

These costs can include car transfer, title and registration, and stamp duty. Interestingly, the stamp duty could be higher in other states, so you may need a stamp duty calculator.

Luxury Car Financing

Currently, luxury car tax may be payable on any car above a specific threshold. In addition, tax benefits of novated leasing for luxury cars may be fewer than those for non-luxury cars.

Steps To Apply For A Car Loan

Step One: Check for the required documents

Before going to a lender or car dealership, it is worthwhile to do some checks first. See if you have the needed forms and car loan documents. You may see about debt consolidation if necessary. This can ease the application process of assessing your trustworthiness and ability to repay the loan.

So, what do you need to finance a car? To apply for your car loan, you should have the following:

Proof of identity

You should have a minimum of 100 points of ID. That is to say, so long as your lender (company) operates under an Australian credit licence, they have to meet the standard 100 points of ID. After all, they have to follow anti-fraud legislation.

ID documents here include a driver's license, Medicare card, passport, and other IDs.

Your vehicle information

This includes details of your vehicle such as make, model, purchase price, engine number, vehicle registration number, and status (new or pre-owned).

Proof of income

This includes two or three recent payslips, employer contact information, proof of employment, and tax returns for two years (if self-employed). Alternatively, you could present either three or six months of bank statements as proof of income.

Proof of assets and liabilities

Here, you specify your income-generating assets to show your financial strength. This can include details on owned properties or bonds investment property. You may even be asked for a summary of your superannuation funds (super funds). Other details that you may have to provide include information on other loans (e.g., property loans), other debts (e.g., credit cards), and ongoing expenses.

Credit and banking history

Lenders may need to check your name, date of birth, and address. These and other details are used to pull your credit. After that, they apply various credit scoring systems. Similarly, they examine your credit history. For instance, they check the type of credit account, credit limit, and opening date.

More so, they examine the account balance, loan amount, and payment history. You should hold proof of asset finance (such as income from child support, alimony, legal settlements, social security, rentals, or other sources).

Proof of residence

Usually, your current driver's license or an address match between your credit application and credit report may provide sufficient residential proof. However, if you moved recently, you may need to present further car loan documentation.

Such documentation could be in the form of the following: utility bill, mortgage statement, property tax bill, renters or homeowners insurance policy, lease agreement, credit card, or bank account statement.

Proof of car insurance

If you are a first-time buyer, you may not currently have proof of insurance. As such, you may want to get one before buying your car. However, if you possess an existing auto insurance policy, it may cover your new car purchase within a certain grace period. So, you may want to confirm that.

In any case, your proof of comprehensive car insurance has to comply with state laws. Remember, this insurance protects the asset used as loan security. If the asset is stolen or written off, it becomes possible to claim the insurance and seek a balance transfer (to pay out the remaining loan balance).

Some lenders could also have other loan application requirements before you can leave with the car.

Method of down payment

Another item you have to prepare as you make a down payment is your payment method. You can decide to use cash, personal cheque, personal loan, cashier's cheque, preapproved loan, debit cards, or credit card.

Document requirements for businesses

If you are processing business loans, you need some specific documents. This can include your Employer Identification Number (EIN). Meanwhile, some lenders may ask for proof of identity documents such as articles of incorporation or partnership agreements.

You may even have to present your business license and business card. Similarly, a letter of authorisation to purchase the car (on company letterhead) may be necessary. Remember, you would still need to meet other requirements. These can include the presentation of a positive cash flow and two years of financial statements.

Step Two: Apply for the car loan

Indeed, you would have performed the needed research before applying for your car loan. For instance, you can compare car loan providers.

As there are home loans calculators, there are car loans calculators or car affordability calculators you could use to match your budget. They can help you work out the approximate cost of your car over the loan term. This can come in handy when lenders ask how much you want to borrow before providing a loan offer.

A car finance repayment calculator can only be used as a reference. A car loan expert may provide better advice on your borrowing power since other factors may affect your car loan. For instance, car loan features such as making extra repayments can mean so much.

Then, you could see the auto loan pre-approval to know if the lender will approve your specified amount. You also get to see the associated interest rate. You may apply online to quicken your application rather than filling it out physically.

Step Three: Application goes for approval

A credit officer reviews the application.

Step Four: The lender requests your documents

The lender requests certain documents needed for the approval process.

Step Five: Sign the loan once approved

If the loan is accepted, you get to sign it. Those who are not Australian citizens or who are under 18 may not be eligible for a standard car loan product.

Step Six: The loan is funded

After that, the loan is funded either to you or your car dealer.

Some FAQs On Car Loans

What is a car loan with balloon payments?

Balloon payments (residual value) are agreed to lump sums paid to a lender at the end of car loan terms.

What do low doc car loans mean?

Low doc car loans (low documentation car loans) are the option available to people who cannot provide the usual car loan application documents. For instance, self-employed people may not be able to provide proof of income. Instead, they may provide evidence of business ownership and good credit history.

The interest rate for low doc car loans may be higher than for a standard car loan.

What is the duration for car loan terms?

Car loan term describes how long it takes to pay off your car loan without any extra repayments. Car loan terms may vary. Generally, car loan terms range between one to seven years. Some lenders may allow a maximum of ten years. In addition to repaying the amount you borrow, you will also be charged interest. Term deposits can occur weekly, fortnightly, or monthly.

How do I get a low interest car loan?

Primarily, to get low-interest car loans or low-rate car loans, try to keep a good credit history. This indicates that you are a trustworthy borrower. Furthermore, it increases your likelihood of getting a good interest rate. Again, going for secured car loans - rather than unsecured ones - increases your chances of getting low-rate car loans.

Qualities Of Good Car Loans

Here are some characteristics of good car loans you can look out for:

Low Interest Rates

First, check for variable rates and comparison rates between lenders. For instance, a lender could offer a new secured car loan interest rate of 4.8% (or 8.15% comparison rate). Meanwhile, another lender could be offering a loan with a rate of 10.7% (or an 11.22% comparison rate). Undoubtedly, the first option with a lower interest rate may be preferable.

Low Comparison Rates and Fees

As earlier mentioned, you should look beyond the low rates on car loans. Some lenders make up for low-interest rates with exorbitant fees. Simply check the comparison rates. They may factor in ongoing fees and upfront fees. However, they may not factor in incidental fees like early pay-out fees or costs of refinancing.

Checking for these rates can make you better prepared if there is the need to make such payments.

Additional Features

Here are some car loan features you could check for:

• Available choice of making additional payments and online payments.

• Option for pre-approval (this can ease negotiation with car dealers).

• Options for balloon payments.

• Available options to switch repayment periods to weekly or monthly.

• Redraw facility.

Benefit From Car Lending Specialists

You know what you need to finance a car from the points mentioned earlier. Also, you are better acquainted with the steps to apply for a car loan, some FAQs, and the qualities of good car loans. But that is not all. Some car lending specialists may offer you other benefits you may not want to ignore.

Looking at car loan repayments, for instance, some lenders may allow you to make weekly or fortnightly repayments to better suit your financial situation. Moreover, it may be in your interest to know what happens to the personal information they collect. Is it protected? Your personal data should be kept secured. Likewise, it should only be used for car loan application purposes.

Aside from offering fixed-rate car loans, your car lender should be able to provide you with financial advice. For instance, they should give you finance options that best meet your needs. Besides, there are car lending specialists who can get your car loan approval done in less than a week, so why not give them a go.