10 January 2022 ·

What is Car Finance?

Most of us simply don’t have a large stack of cash ready to put towards a new car. Car finance offers an accessible way to get into a new car without straining the budget. Finance from a reputable dealership is an affordable option that gives you the freedom to buy the car you need today, with no stacks of cash required.

Since car finance is a term you’re going to hear a lot when shopping for a new car, we’re going to take a closer look at what it is and the options at your disposal.

What Exactly is Car Finance?

Car finance is a type of personal loan that lets you buy a car with little or no cash down payment required.

Similar to home loans, car finance is usually secured against the value of the car, meaning the car technically belongs to the lender until the loan is repaid.

Because cars cost much less than houses, and because the duration of the loan is short, the risk to the lender is lower than with other loans. For the buyer, that means it’s fairly simple to be approved for car finance and leave the dealership with a new set of wheels and a big smile.

What Makes for a Good Car Loan?

All car finance is subject to a few factors that can help you compare lenders and find a better deal.

  1. Interest Rates. The interest rate charged on your car loan is the biggest factor in determining how much the loan will cost over its lifespan.

    The interest a lender charges will vary depending on dozens of factors, and each lender calculates this a little differently. Some common things they consider are the value of the car, your employment status, credit history and the length of the loan term.

  2. Loan Term. This is the number of years your car loan is spread across. The shorter your loan, the less money you’ll end up paying in interest fees.

    Loan terms are typically a handful of years, with three to five years being a common lifespan. Adjusting the life of the loan up and down will affect your repayment schedule and is an easy way to tailor your finance to suit your budget.

  3. Repayments. Lenders each offer different repayment terms, but it’s common to make repayments weekly, fortnightly or monthly. You can negotiate with your lender to make payments on a schedule that suits you, or even to lock in the repayment value and make budgeting easier.

  4. Balloon Payment. If you choose to make a balloon payment you will need to pay a percentage of the car’s value as a lump sum of cash at the end of the loan period. Not all loans are subject to a balloon payment.

What Options Do You Have?

  • Secured vs unsecured loans. With a secured loan, the money you borrow is secured against the value of the car, meaning the lender can sell it if you become unable to make repayments. Secured loans usually have lower interest rates and better terms for the borrower.

    With an unsecured loan, your lender will not be able to sell the car and recover their money. This arrangement suits some people, but unsecured loans are riskier for the lender, and they often come with higher interest rates and shorter loan terms.

  • Fixed vs variable interest rates. If your finance carries a fixed interest rate, the percentage of interest you are being charged won’t change for an agreed amount of time. That’s great if you are buying when interest rates are low and you could save money across the loan term.

    Variable interest rates are the opposite. The interest on your loan will rise and fall with changes to market interest rates and you may end up paying more or less than originally anticipated.

  • Bank loans vs dealership finance. Car lenders come in all shapes and sizes, including traditional banks and those who work directly with dealerships.

    For many, it’s often simpler and cheaper to access finance through their dealership. Dealers have relationships with their lending partners that mean they can offer better loan terms and a simpler experience that takes care of your loan as part of the process.

Need Help With Car Finance? Contact Downtown Toyota Today!

Downtown Toyota connects customers with Toyota Access car loans that offer fixed interest rates and locked repayments to help you stay on top of your budget. To find out more about Toyota Access please get in touch with our friendly team and we’ll be happy to discuss your options with you!