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A lot of people don’t actually know how much their car loan is really costing them. A small change in the interest rate can have a significant change on the money repaid.

For instance, checking out this car loan calculator you can see that a $20,000 car loan with 8% interest over 5 years costs $405.53 per month – while the same loan with 12% interest costs $444.89 per month. That’s $2361.60 more over the lifespan of the loan.

I don’t know about you, but having an extra 40 bucks in my back pocket each month makes a difference to me.

I know that not everyone will be able to get finance at the cheapest possible rates – it depends on your credit history – but most people can probably get better rates that they’re currently getting.

A lot of car dealerships are actually offering better rates than the banks at the moment, so sometimes it makes sense to get your car loan from the same people that you buy your car from.

Perhaps the problem is not many people trust car sales people!

But seriously, you need to take emotion out of it and just go for the best deal. Too many people just stick with the same bank that they’ve been with for years and accept the loan rate that they’re offered. That’s one of the easiest ways to throw money down the drain!

Why do you think your bank has a big, expensive building in the centre of town?

Another thing not to get suckered in by is low monthly payments. Sure, it might look affordable, but that’s probably because the deposit is bigger or the length of time that it takes to pay off the loan is longer.

Car finance

Here’s another example:

In this car loan calculator you can see that if you take out a loan of just $10,000 over 5 years your monthly repayment will be $188.71. However, the same $10,000 loan over 5 years at 20% interest will cost you $264.94. That’s $76.23 more per month which equates to 40% more per month!

I’ll say that one more time for emphasis – 40% more per month!

You might say that nobody will pay 20% interest on a car loan, but you couldn’t be further from the truth. Loads of people buy a new car on a credit card – and many credit cards charge 20% interest per year.

If you didn’t know already hopefully this shows you how important it is to lock in as low an interest rate as possible for your new car purchase. Every percentage point reduction over the lifetime of the loan can make a significant difference.

Credit card debt

Apparently the average Australian owes $4757 on the credit cards, paying between 15 and 20 percent interest – so the figures quoted above aren’t fiction.

Credit card debt is easy to forget about – and often doesn’t seem real.

Car buying strategy

It’s not necessarily a bad thing to buy a car on credit. For some people a car is an essential part of everyday life. However, you should question how much you really can afford to spend; and you should also do everything you can to minimize the interest rate you’re going to pay.

As per the example above you could end up paying as much as 40% more than other people for the same car if you don’t do your research!

 

Hamish Smith is a retired teacher who lives near Sydney. His interests include tennis, reading books and swimming.