Guide to car finance

Author: Kevin McHugh, Head of Publishing at Banked.

How car finance works

Car finance involves borrowing money to purchase a vehicle. You make regular payments to pay off the original amount, plus the interest and any fees that may apply.

The interest rate and the fees you have on your loan will depend on two main factors:

• Your personal circumstances: Including how much you want to borrow, for how long, and your credit history. A lender will take these details into account when deciding what finance terms they will offer you.
• The finance option you choose: This could be directly through a bank or other lender, a broker, or through a dealership. A car loan can also be secured against the car, or unsecured.

This guide will help you understand how you can find the best car finance option for you, how to save on interest and fees, and what traps to avoid.

What’s the best way to get a car finance?

You have a number of different options when choosing how to finance a car, and making the right choice could save you hundreds or even thousands of dollars.

We break down each of your options, including the pros and cons of each.

Using a bank or non-bank lender

Arranging car finance directly through a bank or non-bank lender will be the best choice for many. It might take a little more time than other options, but in the end you can have more confidence that you have found the best deal for you. Compare options and find the best car loan in our guide.

These are the steps to getting car finance with a bank or non-bank lender:

1. Get quotes from different lenders: You can do this online, in person, or over the phone. Many lenders have online quote tools that let you get an understanding of how much you can borrow without affecting your credit score. This step will also let you know if you meet the eligibility criteria of the lender.
2. Check fees, the repayment schedule, and other terms: If you have found a quote you are happy with, the lender has approved your application, and want to go ahead, make sure you fully understand the terms of the loan. This includes what fees apply and under what circumstances.
3. Funds are deposited into your account: Once you have signed the contract the funds will be deposited into your account. If you have a secured car loan, the lender will want evidence of the seller’s account details before they release the funds.

Pros and cons

Using a broker

A finance broker can help you save time, effort, and possibly money, by finding a lender for you. They will work with a network of partners to find a loan that meets your particular needs and circumstances.

If you have had difficulty getting approved for a loan, or you’re not happy with the terms you’ve been offered with a particular lender, a finance broker may be able to help.

Pros and cons

Arranging finance through a dealership

Financing your next car purchase through the dealer you buy the car from is the most convenient option, but it’s unlikely to get you the best finance deal.

Firstly, not all dealerships offer car loans. Those that do will probably only partner with one lender, which means the deal you get will be limited to what that lender offers.

With a range of lenders available in New Zealand, it’s unlikely the one lender the dealership works with happens to provide the best option for your circumstances.

Dealerships may also add a fee on top for arranging the finance, which can range from around $200 to more than $1,000. This is a fee you would avoid if you went to the lender directly. Alternatively, the dealership will get a commission from the lender.

If you do choose to get a car loan through a dealer, remember that everything is negotiable – including fees.

Pros and cons

Can you get a car loan if you have bad credit?

There are a number of lenders in New Zealand who will help bad credit applicants get car finance. If you have already been turned down by lenders, try a broker. A broker won’t be certain to help you finance your next vehicle (or necessarily get you the best deal), but it is an option worth investigating.

If your credit history is not as good as you would like, there are a number of different things you can do to improve your chances of getting approved:

• Use the car as collateral: A loan that is secured against an asset (in this case, the car) is less risky for a lender and so they are more likely to approve you.
• Apply with another person: Lenders are more likely to approve joint applications because the risk is spread across more borrowers. However, if the person you are applying with also has bad credit, your application is still likely to be rejected.
• Repair your credit rating: This option can take a while but it’s likely the best option in the long term. You can improve your credit rating by paying off your debts (see our guide to debt consolidation loans) and by ensuring you pay bills in time.

Alternatives to a car loan

A home loan top-up

If you have a mortgage, you may be able to borrow more from your mortgage provider in order to fund the purchase of your new car. The most obvious benefit of doing this is the lower interest rate mortgages have when compared to the average secured car loan — the typical secured car loan will have an interest rate that’s twice as high as the average mortgage rate currently.

But that does not mean it’s a good alternative for many people. Because you are likely to be paying your mortgage off over a much longer period, you may end up paying more in interest if you add the expense to your home loan, when compared to a shorter-term car loan.

If a home loan top-up is an option for you, calculate how much interest you would pay overall vs a car loan before you make a decision.

Buying a car with a credit card

Funding the purchase of a car on a credit card is only worth considering under particular circumstances:

• The car you want to buy is relatively cheap: You can only buy a car (entirely) on your credit card if you have a credit limit that’s high enough to afford it.
• You have a low-rate credit card: The lowest credit card purchase rate currently available in New Zealand is around 12%. This does not compare too badly with the rate you could expect with a car loan. It is important to factor in the credit card’s annual fee, however.
• You are disciplined: If you continue to spend on the credit card, it will take you longer to pay off the outstanding amount, meaning you pay more for your car overall.

Compare credit cards now.