In our previous BLOG I shared with you all some insights regarding Personal Lending – Credit Cards and Personal Loans, in this edition it’s all about Car Loans.
There is no doubt financing a vehicle can be confusing, complicated and not to mention emotionally driven. I must say that there is a perception that the car finance (and for some who work in the industry) industry is built on lies and deceit. I don’t share this opinion but sometimes I shake my head with what I have seen. I know a lot of people who work in this field, who conduct themselves to the highest order but (like all industries) there are some who are rotten eggs. We have seen situations where clients have been financed in vehicles with insurance policies worth thousands of dollars, high caliber clients charged interest rates well over 15% and balloon payments more than the car will be worth at the time the loan concludes. Today, I am going to give you an insight into what to be mindful of!
I have mentioned in my previous blog that all loans are assessed with a review of the customers circumstances – car loans are similar, only difference being an assessment of the vehicle you are wishing to purchase. Similar to house lending, a maximum lending limit is set but what is different is the maximum. Typically when borrowing for a house, the maximum loan limit is 95% of the value – For car it can be as high as 160%. This allows a borrower to move from one vehicle to another without a deposit or for that matter paying much of their existing vehicle. Whilst this might sound ok, the lender (finance company/bank providing the finance) will charge a rate loading (extra amount) for this honour – seldom is this is communicated to clients, as a client should be given the opportunity to weigh up the trade value they are getting for their vehicle compared to selling it privately. It could mean the difference between completing paying of your car versus carrying over a few thousands of dollars onto the new contract. I suppose the important thing to remember is you shouldn’t be rushed into a decision as you should consider all options.
Car Loan interest rates is a really interesting topic. There is so much smoke and mirrors around this, I can see how people can get confused. I want to share with you my 2 observations in reference to the rates that are set by the Finance Manager at the car yard and special offers ie 0% offers advertised in the media. You may or may not be aware that most of the vehicles in a car yard are financed car dealerships floor plan their dealership (what does this mean) which means that they fund the purchase of vehicles to on sell to make a profit. The companies that fund their floor plan in almost all circumstances offer a retail facility which allows the dealership to sell finance to clients wishing to purchase one of their vehicles. The dealership is provided a base interest rate (the minimum rate they can charge a client), the finance manager then has the option to increase the interest rate. Often the dealership (like all retail outlets) have profit expectations and higher rates are in most instances given to clients to achieve them. It is not uncommon for a dealership to offer a client 15% and an independent broker offer the same client 6%. Independent brokers like dealerships will charge clients an origination or brokerage fee to organise your finance. The difference between a broker and a finance manager at a car dealership is a broker charges the fee to find you the best deal whilst the dealership will “load/increase” the minimum rate in order to match your budgeted repayments. I would always recommend clients shop around or don’t be rushed into a decision to finance.
Have you ever seen an advertisement for a new car which say 0%? Recently many car companies have been offering low interest or 0% car finance interest rates on new vehicles. This looks to be a good deal but is it? The main manufacturers like Toyota, Holden, Ford and Nissan all offer these deals as a hook to lure customers such as you who may not be in the market at the moment. Be warned! Whilst it might appear as an interest free loan, often it is NOT!. You may end up paying much more for your new car than if you had shopped around and (maybe even) financed your new wheels through an independent broker like us (insert plug here).
If car dealers are not charging interest on their finance deals, they have to make up the difference in other ways. In fact, there are lots of ways they can do this that you need to be aware of. The Price – If you walk in to the showroom and ask for the 0% car finance deal, the price is often not negotiable, you’re paying full retail. You can almost certainly negotiate a better price with the dealer if you’re not asking for the 0% finance option. Trade In Value – If you’re trading in your old vehicle you’re likely to be offered a much lower price. Loan Flexibility – the structure of the finance is also likely to be less flexible (term of the deal, balloon payments etc). And finally, “Guaranteed Price On Future Trade In” is another option offered by some dealers is a “guaranteed price at future trade-in” against your next new car. From a psychological (and sales) point of view, this is the same as locking you in to buying your next car from them as well – very clever! Again, the problem is that the cost of offering this guaranteed buyback price is generally an upfront loading to the cost of the car. And often these deals come with restrictions that may preclude you from taking up the offer anyway when it comes time to upgrade. Needless to say there are ways in which clients utilising these types of facilities can be penalised for using them.
I get really concerned that clients really don’t have much of an understanding as to what is contained on their contracts. We have seen instances where clients do not know interest rates, terms and other important items such as insurances included, balloon payments and other inclusions such as warranties or after market purchases. Inevitability all of these items have a bearing on the amount of interest you are going to pay back your monthly repayment. What is important, is knowing exactly what is included in your contracts – it sounds crazy but READ IT! Weigh up the difference of an independent brokers offering – obtain a comparison quote. Independent brokers rarely lose a client to a client to a 0% or for that matter any reason to a car yard……Why you may ask? Well the answer is simple, a broker will attempt to build a longer lasting relationship for their clients where they want you to keep utilising their services. A car yard sees the sale of a car as a single transaction.
It’s not all doom and gloom when financing a vehicle in a car yard, you just need to be aware that the industry thrives on the emotions that are involved with purchasing your new car and all those things that will make you forget about the cost of borrowing or worst justifying it. Cool heads always prevail. Always speak to professionals, read the fine print and ask questions should you not understand any regarding your finance.
As I have mentioned many times previously we’re here to help you find the right loan to meet your circumstances. Call us to discuss whatever you need a 5 minute call may save you thousands.