Dealer financing can be tempting but it is generally the most expensive option. Dealers either offer their own branded finance (Toyota, Subaru and Honda) or other finance company deals. When we mystery-shopped car dealers, it was easier to get loan quotes based on credit history from dealers offering their own finance, than those who were selling other finance company products. Your credit history will determine the interest rate, but all of them will generally be higher than what you could get through a bank or credit union.
Be wary of accepting finance when you haven’t got a full disclosure statement before signing up, which covers the amount borrowed, annual interest rate and the way it’s calculated. New rules requiring much better disclosure should be passed this year.
Finance companies offer dealers fees and commissions to gain their business, which push up loan-establishment fees and the overall cost of the loan to you.
Better options are a loan with your bank or credit union, or going directly to a finance company. Credit unions require you to have been a member for a period, usually 12 months. However, they do offer competitive interest rates.
Many of us have a mortgage and its interest rate is lower than smaller personal loans so it seems like a no-brainer to extend it for a new car. But this can be a trap. The low interest rates only work in your favour if you pay off the car in the same period you would have done if you’d taken out a personal loan. The longer you pay, the more interest you pay!
Another option is leasing, which may suit self-employed people because repayments can be tax deductible, but it’s rarely a good option for ordinary consumers.
Don’t forget some lenders will require loan-repayment insurance and you will also need to insure the car against loss or damage once you take ownership.
The best option is good old-fashioned saving until you can pay for it. This saves you hundreds in interest and you may even be able to negotiate a cash discount.
By Sue Chetwin, CEO Consumer NZ.
Image credit: ACP Photographic/ bauersyndication.com.au