ge5220690117800410189
Carsales Staff24 Aug 2015
ADVICE

What is the best way to pay for a car?

You're planning to buy a new car, but how should you go about paying for it?

You've used all the online tools motoring.com.au and carsales.com.au have to offer, and finally decided on the new car for you (Ed: shame on you if it's another bloody SUV!). You've picked the colour, carefully chosen the equipment grade and you even have an idea of the options you'll tick.

How are you going to pay for that new vehicle? Are you better off paying cash or taking out a car loan? And, if you've chosen the latter route, what are the choices when it comes to car financing? Do they vary between buying a used car or a new car?

motoring.com.au and carsales.com.au affiliate stratton Finance is one of the country's top lenders for automotive finance. Sure, they'd like to sell you finance (there's even a link at the bottom of this page) but, they're also an excellent source of information in a field that can offer traps for young player.

Here's the stratton crew's advice...

Should You Pay Cash For a Car?

Paying cash is the best option when you have lots of it to spare. There are no borrowing costs, no repayments and you don't need to go through the process of applying for a car loan.

If you don't yet have the cash on hand you'll need to budget and save. Realistically, how long will that take?

If you choose to pay cash, how sound will your finances be once you've made your purchase? Would running and servicing costs lead to cashflow problems further down the road? And would you be able to cope with any unforeseen expenses?

If you're in a position to pay with cash, it ultimately comes down to personal circumstances as to whether it's the best option or not.

Car Finance

Finance is, by far, the most common way people purchase new cars. And with interest rates at record lows, it's never been cheaper to arrange a car loan.

Car finance can be structured so that you get a fixed interest rate for a fixed term. That makes your repayments predictable. From the outset you know what your monthly repayments will be and for how long you'll be paying them.

Another common feature of vehicle finance is the option of a balloon payment at the end. Balloon payments make the process of paying off your finance more affordable. They allow you to just repay the amount by which your vehicle depreciates during the three to five year term. At the end of the term you make a lump sum payment to cover the balance of the car loan.

The beauty of this method is that you can sell your vehicle at the end of the term and use the proceeds to cover the balloon payment. It's an affordable way to update your car regularly. Alternatively, you can opt to take out another loan to cover the balloon if you want to keep the car.

There's a huge range of car finance packages on offer, all different and geared towards different needs and borrower niches.

Without expert knowledge, the choice can be overwhelming and confusing. As such, the guidance of a lender or broker like Stratton can be invaluable in helping you choose a car loan or other form of finance better suited to your needs.

There are six major categories of car finance:
Finance Lease
Chattel Mortgage
Novated Lease
Fully Maintained Novated Lease
Car Loan
Personal Loan

Each financing option has pluses and minuses depending on your situation. We will examine some of these options in a future articles.

Using a Credit Card

Using a credit card to buy a car may seem like a convenient option and you might be keen to receive the rewards points, however, it's important to do your research beforehand. The last thing you want is for your $30,000 new car purchase quickly turning into an even more significant commitment, courtesy of sky-high interest rates.

Be sure to fully understand the terms and conditions of your card including its interest rates, limit, and any associated surcharges before making any such purchase.

Car dealers pay a merchant surcharge when their customers use a credit card as the method of payment and this can range anywhere between 1-3%. In most cases this surcharge is passed directly on to you.

Typically, financing the purchase of a car using a credit card would not be advised with the above alternative methods representing better options. The only instance in which it may be considered favourable is for the purchase of a used car of very low value. In fact, in such cases a credit card may be your only option.

Using Your Home Loan

Re-drawing on your home loan to buy a car can seem like an attractive option. If you have a flexible mortgage that allows re-draws, you can use accumulated equity to finance your car.

The chief benefits of this method are the convenience of not having to apply for a new loan; also the ability to take advantage of mortgage interest rates, which are generally lower than car finance rates.

Without care and discipline, however, this form of financing can be an expensive option.

It's worth checking to make sure you won't incur redraw fees. And you'll also need to increase your mortgage repayments to a level where you'd pay off your car borrowings within 3-5 years in order to take advantage of the lower mortgage rate.

The deceptive allure of re-drawing against the mortgage is that you can buy your car now without having to make substantially larger repayments or indeed just paying the interest on what you've borrowed.

Doing so could be a huge mistake. Spreading the costs of a car loan repayment over the full term of a mortgage can easily triple or quadruple your borrowing costs!

Another danger of using your home loan is the risk of falling into negative equity territory.

Negative equity is when your outstanding mortgage exceeds the market value of your home. It makes moving or selling your home difficult. With negative equity, you're effectively trapped in your existing home unless you can find the lump sum needed to pay off the outstanding mortgage balance after selling your home.

Refinancing your home loan

If you've accumulated equity in your home another alternative might be to refinance your home loan. Mortgage refinancing involves transferring your mortgage to a new lender who offers more advantageous terms or extending your existing loan facility for the funds you need.

As we've already mentioned, interest rates are at record lows, so you may well be able to find a lender offering a more attractive deal that also allows you to release some of the equity in your home.

Small reductions in interest rates can make a huge difference to the total cost of financing over the mortgage lifetime. So you may find savings on a better mortgage deal can help you meet car loan repayments without the need to release equity. That said, as with drawing on equity in the previous example, spreading car repayments over longer than five years does have its risks.

Mortgage refinancing can work particularly well if your credit score has improved since you mortgaged the property or your property's value has appreciated substantially. At the same time, it is important to ensure you have been meeting your current home loan and other debt commitments (like a credit card) on time as not doing so can impact your ability to get a better property finance deal.

The downside of refinancing is that you'll have to go through the process of revaluing your home and you may be faced with refinancing fees.

stratton Finance is part of the carsales.com Ltd group of companies.

Share this article
Written byCarsales Staff
See all articles
Our team of independent expert car reviewers and journalistsMeet the team
Stay up to dateBecome a carsales member and get the latest news, reviews and advice straight to your inbox.
Looking for a family car?Get the latest advice and reviews on family car that's right for you.
Explore the Family Hub
Family
Disclaimer
Please see our Editorial Guidelines & Code of Ethics (including for more information about sponsored content and paid events). The information published on this website is of a general nature only and doesn’t consider your particular circumstances or needs.

If the price does not contain the notation that it is "Drive Away", the price may not include additional costs, such as stamp duty and other government charges.
Download the carsales app
    AppStoreDownloadGooglePlayDownload
    App Store and the Apple logo are trademarks of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.
    © CAR Group Ltd 1999-2024
    In the spirit of reconciliation we acknowledge the Traditional Custodians of Country throughout Australia and their connections to land, sea and community. We pay our respect to their Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.