Lending for a vehicle seems to be one area of lending where borrowers aren’t getting the full picture.
There are many zero percent campaigns, low rate advertisements, but in truth, you need to see the full picture when weighing up your borrowing options. Focusing on one or two pieces of the puzzle may see you out of pocket for missing the bigger picture.
There are 5 areas you need to address when borrowing for a car, these are;
All of the above will impact on the cost of a term loan, and any change to one will normally impact on the others. We will use the following scenario borrowing $30,000 over a term of 4-5 years.
Repayment- this is a sum total of the below, any tweak to rate, term, balloon or brokerage will change this figure.
Balloons- applying a balloon can give you an artificially low repayment, working with a brokerage of $1,000 and applying a $10,000 balloon over 5 years will reduce the repayment from $612.92 per month to $478.43, but at the end of the term, you will need to pay the lender out $10,000. A balloon is a great way to make a loan seem more affordable, but very rarely will they provide a benefit to a client.
Brokerage- to pay this loan out over 5 years it would cost you $598.87 per month at 6.7% being the delivery rate with zero brokerage. As soon as we apply brokerage of $1,000, this increases the rate to 8.12% and the repayment to $612.92 per month, so even though the rate has blown out, overall the repayment has not significantly increased. Take the time to find out what you are being charged for borrowing the money, as some financiers charge well beyond what is fair and reasonable.
Term- standard term for a term loan is 5 years, if we look at the $30,000 asset, over 5 years on a standard loan paying $612.92 per month and see $36,775.20 repaid, taking a 4 year term will cost around $738 per month, but see $35,425 repaid, whilst taking a 7 year term will only cost $463.34 per month but see $38,921 repaid. Considering the loan term you must weigh up what the asset will be worth at the end of that period and how much you are prepared to pay in interest along the way.
Rate- Ironically one of the least important factors when determining to overall cost of a term loan, but one of the most heavily advertised. Surprisingly many lenders will have similar rates, so the alarm bells should ring when a lender has a particularly low rate offering. A lot of the time, if it sounds too good to be true, it probably is.
In closing beware of slick campaigns and a sales process that doesn’t openly cover off on all of the above points, for any pricing, please get in touch.
The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered and advice and relevant research carried out.