What do you need to know before signing a car finance contract?

A car is often the second biggest purchase you make in your life behind a house – so it’s critical you know what your getting yourself into.

If you’ve decided to get finance instead of paying cash, it also pays – pardon the pun – to ask the right questions before you autograph any contracts.

In this article, we assume you’re already at the stage of organising the finance and are ready to sign. Double check with yourself you’ve asked these questions before signing anything.

Understand the total cost of the loan

Lenders will lure you in with a sharp “headline” interest rate, but it could be bundled in with other loan conditions that mean at the end of the day, the total cost of the loan can be more expensive than at first glance.

Get your head around all the fees

Some lenders will charge an establishment fee and a monthly account keeping fee. 

If that’s $395 and $10/month respectively, the very low interest rate is suddenly looking a bit limp.

This is why it’s important to focus on “comparison rate” rather than “interest rate”. 

The comparison rate includes the interest rate plus most fees and charges and is more representative of the total loan cost. It’s worth noting that comparison rates don’t include stamp duty and other government charges (where applicable) nor early termination fees.

Here is a list of fees to ask about:

• Upfront fees, such as an establishment fee
• Monthly account keeping fees – if any
• Early payout fee – if any
• Documentation fees – if any

Ask about the early exit fee up-front

Many lenders will sting you with an early termination fee. Even if you think you’ll see out the full term of the loan, it pays to know what this is. You never know when your circumstances may change. Find out how flexible your loan might be if you want to make additional repayments.

Know your monthly repayments

It might make more sense to you to pay more over the life of your loan – for lower monthly repayments.

Some lenders will do a deal whereby at the end of the loan, you pay a 30 percent residual payment – a lump sum known as a balloon payment – when, for example, you sell the car. In exchange, over the course of the loan, while your total loan cost might be slightly higher, your monthly repayments will be lower. This is helpful for those where monthly cash flow matters a lot.

A balloon payment may allow you to borrow more, lower your monthly repayments and increase your chances of your application being approved. A broker can advise what kind of balloon payment is right for you.

The takeaway

Don’t be seduced by the sexy low interest rate. Make sure you understand just how much the loan will have cost you by the time you pay off the last dollar. The differences – which are often made in hidden charges – may surprise you.

Disclaimer: The information on this website is for general purposes only and not a substitute for professional financial advice. CarExpert recommends seeking independent legal, financial, taxation or other advice unique to your individual circumstances.