Buying a car isn’t as expensive as getting a house, but it’s still a massive undertaking, especially if you plan to take out a loan for it. Before you jump right in, here are a few things you need to consider before taking out a car loan.
Factor #1: Do you need one?
First of all, you need to think it over. Do you really need a car right now? Maybe you’re just a wee bit envious about your neighbour’s sweet new ride so you’re thinking of getting one too. Or maybe you really need to purchase one because you just moved and your home is now further from your office. Whatever your reasons, a car is a significant commitment so it requires careful consideration.
Factor #2: Your credit score
So maybe you really need a car, but if you have a low credit score, you may have to rethink your decision. Your score will determine your interest rate, which in turn would affect how much you would allocate for monthly payments. A low would mean higher expenses.
This doesn’t mean you shouldn’t push through with your plan, but you may have to postpone the purchase while you work on improving your credit score.
Factor #3: Your budget
Here’s an even more important factor: can you afford a car in the first place? Do you have enough room in your budget? Take note that “enough room” doesn’t mean you have zero dollars left after each monthly payment or cutting back on food, resulting in ramen dinners for the next five years.
Remember, you still have to pay for the car’s insurance, petrol, maintenance and registration. And of course, you’ll likely run into other non-car expenses. So if your budget can’t handle the strain of all these expenses with a little room to spare, you may have to ditch the plan for now.
Factor #4: Your behaviour
What’s your spending behaviour? Do you have the discipline to pay for a car loan on time for the next 60 months? Can you handle not going on impulse buys or binges during that period? Be realistic about your behaviour; if you don’t have the self-control, you shouldn’t push through with the loan.
Factor #5: Interest rate
Naturally, when shopping for a car loan, you need to consider the interest rate because it would directly affect how much you’re going to spend each month. This means you have to do your research and look into numbers like annual percentage rate and comparison rate. As a rule of thumb, the best car loan is usually the one with the lowest interest rate.
Another aspect of interest rate you have to consider is if the car loan uses a fixed rate or a variable rate. Fixed rate means the interest is unchanging throughout the loan, while variable rate is affected by the prevailing cash rate. Be sure to compare car loans before you decide which one is best for you.
Factor #6: Repayment terms
You’d also look into the car loan’s repayment terms. Ideally, the schedule should coincide with your payday so that you won’t be scrambling for cash. If your budget can handle a shorter repayment period, then go for it; this would result in savings. Avoid stretching the repayment period for far too long (tip: for car loans, not longer than 5 years), or else your loan would turn upside-down, which means the debt is worth more than the car.
Factor #7: Fees and charges
Fees and charges are another aspect to consider. Normally, loans have an application and late payment fee, but there are others with quarterly fees and defaulting charges. You may think you found a bargain because your loan has low interest, but if it came with large fees, it would offset your savings. Don’t take the fees and charges for granted.