Hey car lovers, are you planning to take out a car loan? If so, it’s important you know what to look for before signing on the dotted line. After all, with high-interest rates and hidden costs, they can be more expensive than ever before. So follow our guide to not getting caught out by these costly traps…
What’s the APR?
Interest rates on car loans can vary dramatically – from 3% to about 18%. And while a low-interest deal might seem attractive, it may still be more expensive than you think. For instance, a loan with a rate of 10% over four years will have you paying twice as much in interest compared to one with a 5% APR over eight years.
So make sure you can afford repayments, and opt for a loan where the interest rate is lower than your credit cards. Check out Driva car loan options to assess a range of car finance options.
What’s included in the fees?
Car loans typically come with some form of arrangement fee, which will be charged as a percentage of the loan. But it’s important you know what this covers to make sure you’re not being stung with any hidden extras. For example, most loans don’t require the same security as a mortgage, so if you’ve been asked for a large deposit – it may be because the lender is trying to cover other fees.
Will I have to pay anything else?
Car loans can be paid back on a monthly, quarterly or six-monthly basis – and the way your repayment is structured might make a difference. For example, some lenders will let you repay more quickly to reduce the overall cost of borrowing – but expect them to charge an early repayment fee if you break the terms of the loan.
So if you’re confident you can pay back within a few months – check whether it’s cheaper to do so and avoid paying fees.
How long is the term?
The longer your car loan, the more it’ll cost – and generally speaking, the later in life you are, the more likely you are to be offered a short-term deal.
However, shorter loans can mean bigger monthly repayments – so it’s important you do the maths first, especially if you’ve got other commitments on top of repayments (like rent or bills).
Do you want to pay a deposit?
The deposit you pay upfront affects how much interest you’ll pay over the lifetime of the loan. This means a larger deposit will reduce costs, but it can be hard to find a lender who’ll let you borrow money with nothing in advance.
So think about how big a deposit you can afford, and shop around for a car loan that suits your needs best. And remember not to borrow more than you can afford.
What will my monthly repayments be?
It’s important you know how much you need to pay each month when applying for a car loan. These payments won’t include interest, so if unsure ask the lender to break down how much it’ll cost over the duration of the loan.
If you’re struggling to afford monthly repayments, it might be worth considering extending the length of your loan. However, this will usually mean a higher overall cost too.