A year ago my husband & I purchased a car on finance. It was $40,000 and the loan term is 7 years. So we have another 6 years left of paying $200 a week towards it. I love our car, we've never had any issues with it whatsoever however I feel like we made such a rash decision and could have gone about it a better/ more financially smarter way! (ie- a personal loan with the bank) We have never defaulted and keep up with payments...just. By the end of the loan term we would've paid $30,000 in interest alone which is quite depressing. Has anyone been in a similar situation? Did you have car finance regret as well? Is there a way out?
11 Replies
I know lots of people who have made this mistake. Find out what your 'balance' is and what you would need to pay the loan out. Then speak to a bank/credit union about a personal loan. Banks generally have lower interest rates, so you might save some money by borrowing from a bank to pay the car loan and then repaying the bank.
If you have any equity in your home you may find it cheaper to take out on the home loan to pay the car off.
I'm feeling you, I did the same so it freed up more money at the time to pay for my sons college tuition. I worked out this week that by the time I pay off my $20K car I'll have paid over $35K for it. Lesson learned...
Yep i did. Got s loan young seemed to be ghe done thing to get a decemt car. Five year loan, about 3 years in yes i really regretted it. I got a payment and was abke to pay it out early and lesson learned, ive never wanted finance again. I recent,y bought a car outright, saved up, its second hand i couldve got a better pretty amazing one with an extra ten thiusand, but its all mine and that makes me love it even more. my money i get now is all mine too.
Great post
Hi there,
I actually work for a finance brokerage firm based in Brisbane and I completely understand where you're coming from. I thought I would add my 2 cents given that being in the industry has afforded significant experience with finance along with intimate knowledge of lender's guidelines etc.
We get quite a number of people coming to us asking to refinance their existing car loan for a better interest rate/lower repayments/longer term etc. Unfortunately when you're comparing an existing secured car loan versus refinancing with a personal loan, there usually isn't much point.
Personal loan interest rates currently start at around the 12% mark, through banks they're usually around 13-14%, given that I don't know your current personal circumstances, I would assume that if you purchased your car brand new, you would have a secured car loan which would be at a lower interest rate anyway. This is because the risk to the lender is lower since your vehicle is secured against the loan.
Unfortunately as well, a 7 year term currently is the longest term you can take a secured vehicle or personal loan of around $30,000 over, so there isn't an option to extend the term to make repayments more affordable either.
When you consider the option of refinancing using a personal loan, one of the advantages would be that the financier probably won't secure the loan against your vehicle, so you are free to sell it at your leisure since there is no encumbrance. However, you need to weigh up the benefits and costs associated with refinancing versus keeping your existing loan.
~ As I said, personal loan interest rates generally start around the 12% mark, therefore are you actually going to receive a lower interest rate through a personal loan than what you're currently on?
~ Also, what are the early termination fees that will be payable on your current loan? Because these will need to be factored into your payout figure which equates to more money that needs to be financed on your new loan.
~ Are there any establishment/application fees or monthly account fees on the personal loan product that you're considering through your bank, again, more fees that will need to be added to your new loan?
I would suggest using a vehicle finance calculator or loan comparison calculator to work out whether refinancing will actually be beneficial to you in the long run once you consider the higher interest rates on personal loans, the early termination fees on your current loan since you're very early into the loan term and any applicable application/establishment fees on a new loan.
Regarding adding your car loan to your home loan, the only time this will ever be a good idea is if you absolutely NEED to lower your repayments to be able to afford to keep up with expenses. Even though your home loan will most probably be at a lower interest rate, you will pay a considerable amount more interest than you would with a separate car loan because of the higher total amount financed coupled with the 25-30 year duration. For an explanation of why this is a bad idea, please visit http://www.creditone.com.au/blog-view/why-you-shouldnt-use-home-equity-t...
The absolute best way hands down to reduce the interest payable on your loan unfortunately is just to make any additional repayments you possibly can. This will pay the loan out faster, thereby shortening the term of the loan and can significantly reduce the interest payable on your loan, even more so than a few percent difference in interest rate.
If you are still considering the option of a personal loan, my suggestion would be to consider refinancing with these guys: https://www.ratesetter.com.au/
They are a peer-to-peer lender, which means that they don't 'buy' the money that they lend from a bank, it is average Australian's like me and you who invest with them - that is where the money that they lend comes from. Therefore they don't have to pay a bank for the privilege of borrowing money to lend to people, so interest rates can start from around the 10% mark. They will also use your vehicle as security for the loan so as to reduce the risk for their lenders, hence why they offer lower interest rates than banks for personal loans. I have no affiliation with RateSetter, I do not work for them, but I have personally refinanced my car and motorbike through them in April. Trust me, I did a tonne of research on them and peer-to-peer lending prior to committing.
If you're not sure and want to look at all options that are available based on your exact, specific circumstances, you're welcome to contact one of my colleagues for a confidential, obligation-free discussion. Credit One | 1300 273 348 | www.creditone.com.au
Either way, I just want you to know all the options that are out there as I have been in the same situation as you previously and it's not a great feeling.
Good luck and I hope all goes well for you.
What an awesome response thank you SO MUCH!
I don't think I would consider a personal because in the long run it does seem to work out the same as if I just continue paying off the finance at the rate we are now.
I think it is smarter to pay more than the minimum payment each week. However I still have to pay right up until the 7 year contract is finished don't I?
I agree, if you can afford to do so, that's probably the best way to reduce the total amount you will pay over the duration of the loan. Generally with a secured car loan, you have to continue making the minimum repayments specified (or more obviously) not up until the end of the term - up until the entire amount financed is paid off. So if you make additional repayments, you can pay it out earlier.
Because interest is generally compounded daily and charged monthly, the faster/earlier you make repayments, the less interest is able to accrue. So even just making payments weekly if your pay cycle is weekly, as opposed to paying monthly will pay of your loan slightly faster because the interest is calculated (or compounded) each day and then added to the loan (usually) monthly.
Again, I don't know your individual contract or circumstances, but in general, you only have to make payments until you've paid out the total amount financed. The total interest calculations they give you are based on you making the 'minimum repayments' until the end of the term.
For a rough guide as to how additional repayments will impact your loan, have a look at an additional loan repayment calculator, ours is here http://www.creditone.com.au/additional-repayment-finance-calculator. Although if you google 'Additional Loan Repayment Calculator', you're sure to find that each of the major banks will have one as well, so you can use your own bank's calculator version if you feel more comfortable doing so.
Long story short, because interest is calculated on a daily basis, the faster you make payments on your loan and the more you pay, the less interest you have to pay, because the lower the 'total amount still owing' is to calculate interest on.
Hope this helps.
You don't have to pay right up to the end if it's anything like mine. Give them a call to check but the way mine works is if I pay it out earlier I pay a penalty of $5 per month for every month it was early (so for 12 months early it will be an extra $60).
Car finance is usually ALWAYS a mistake. Every person I know who can't afford to buy a house has a car loan. It is a mistake most people make, though. We did, too. Luckily we were early 20's so learnt our lesson young. There's nothing you can do about it now. Other than perhaps selling your car, buying a much cheaper second hand one, using the rest to pay off a huge chunk of that loan to get out of debt quicker. And yes, you absolutely can pay the loan out quicker than 7 years. You could pay it all out tomorrow if you could. I agree ask a bank to refinance. It's a lesson learned. If you can't pay cash for a new car then just fix the one you have. Always.
We did this. Mistake yes. Regret no because 4 years in to our 5 year loan we still have a great car that gets us everywhere we need to go and more. We have a year left technically but with extra payments it will be paid off by xmas then we are debt free. I personally will never buy a car more than 10-15k on finance ever again. The plus side is our credit history is amazing! And will look good when we eventually buy a house with the money we can save when car is paid off
Definitely make sure you shop around, discount online lenders like OurMoneyMarket are the way to go!