How Much of my Income should be spend on a Car Loan?
If you’re looking for a car loan, it’s pretty tempting to go with the cheapest rate you can find. Why would you want to pay more when you can get the same thing for less? Well, you’ll want to make sure that you are in fact getting the same thing. Often car loans that have low interest rates don’t actually work out much cheaper than standard loans, and can sometimes even be more expensive.
Understanding interest rates
With any car loan, you’ll have to pay back the amount that you borrow – this is usually called the principal payment. Remember though, that you’ll also be charged interest each month which you’ll pay back with your monthly repayments.
The interest rate that you have on a car loan can be either fixed or variable. You’re able to choose which of these options you want to use and it will depend on your financial situation and how specifically you have to budget each month.
Low rate car loans
In Australia, a low rate car loan is generally around 4.99%. There are some that are lower and some that are slightly higher that are still considered low rate car loans.
Of course, low rate car loans can work brilliantly for some people as they offer a low interest rate which means lower rates of interest are added to your repayments each month.
What are the pitfalls of low rate car loans?
There are some things you need to be aware of though if you choose a low rate car loan. These can include:
- High early repayment or exit fees: if you choose to exit the loan early or to pay it back before the loan term has completed, you may be charged extremely high fees. If these are very high, they may cancel out the savings you made with a low interest rate.
- Inflexible loan terms: with low rate car loans, you may have less flexibility when it comes to choosing your loan terms. This can mean that you don’t get the ideal loan for you and in fact the lender is able to recoup some of the money that you would potentially save with the low rate car loan.
- Long loan terms: if you do the sums, you can work out that paying a low rate over a long period of time can lead to minimal or no savings compared to paying a slightly higher rate over a shorter period of time. In this case, it’s worth doing the sums and figuring out what’s best for you.
Find the cheapest car loan for you
There are certainly advantages to low rate car loans – but you just need to make sure that you’re getting the best deal for you and that you’re not compensating in other areas.
Article provided by Positive Lending Solutions