A Beginner's Guide to Getting a Car Loan
To put it simply, a car loan is a personal loan where you borrow money from a lender and you agree to repay it in instalments with interest over a period of time.
You can apply for a car loan from different types of lenders such as banks, online lenders, credit unions, and other financial institutions. With many options to choose from, it just make sense to shop around to ensure you’re getting the best car loan product for you.
There are four main components of a car loan that can affect your monthly payments:
- Loan amount:This refers to the value of the loan.
- Interest rate:This is the cost for borrowing the loan amount. The interest rate is determined by your lender.
- Down payment:This is the upfront amount you need to pay to the lender.
- Loan term: This refers to how long you’ll repay the loan. It can be months or years.
- Set up fees and costs: Your lender will levy certain charges when you apply to start or terminate a car loan.These are application fees, brokerage fees, commission, and account keeping fees, exit and discharge costs.
What is the process for applying for a car loan?
The process when applying for a car loan varies from lender to lender. But the general process involves applying for a pre-approval first. A pre-approval will indicate your borrowing power and the size of your monthly repayments.
An important factor in getting approved for a loan will be your credit history and the documents you submitted. You will need to provide your lender with information about yourself, such as a proof of income, proof of residence and identity, assets and liabilities (credit cards, home loan, and other debts), character references (employer, landlord,) and vehicle information.
After you submit the necessary documents, your lender will take the required steps to confirm their accuracy. If all is good, your lender will then approve your car loan application.
What is a residual value or balloon payment?
A residual value or a balloon payment is a lump sum that you pay to your lender at the end of the loan term. It allows you to reduce your monthly repayments during the term of the loan and then pay a larger amount off at the end, often on sale of the vehicle. For example, if you bought a $35,000 car with a loan term of 5 years, and chose a residual value or "balloon payment" of 25% ($8,750), your monthly repayment would be $540.35. This is significantly lower than the $667.57 you would pay each month without the balloon payment.
With a balloon payment the monthly repayment is cheaper, but the overall amount of interest payable over the life of the loan is greater, and the residual value will eventually need to be paid at the end of the term. You can use our car loan calculator to get an estimate of your loan repayments.
Questions to ask your lender
Before driving off your newly-bought car, you might want to ask some questions first to make sure you’re getting the right financing. Here are some of the questions you might want to ask:
- What are the requirements?
- How much is the required down payment?
- Is a balloon payment possible?
- What is the interest rate? Is it a fixed rate or a variable rate?
- What are the upfront and ongoing costs?
- Is it possible to make additional repayments?
- Is there a penalty for a late repayment?
- What are the discharge and early exit costs?
Now that you have the important information, you can apply for your first car loan.