The Toyota Corolla has been the best-selling car in New Zealand for the past 5 years.
Car loans vary significantly between reputable lenders. This makes it a real challenge for customers to compare different loans at a glance. There are a great many variables – interest rate being the obvious benchmark for at-a-glance comparisons, but the myriad establishment fees, administration fees, and early termination fees often add up to far more than a few percentage points of variation.
This is why it really pays to do your sums. “People often focus on just the interest rate,” says Carl Jones from www.carloans.co.nz. “It’s an overly simplistic way to assess the relative merits of different loans. For example, a loan at seven per cent seems like a much better deal than one at 10 per cent, obviously. However, when you grab a calculator and crunch the numbers on the true cost, it’s common enough to discover that the loan with the notionally more expensive rate is often enough actually the cheapest.”
Let’s say you have three potential loans on the table, all for the same amount and all for the same term. All have slightly different rates and different fee structures. How should you compare them?
Jones advises consumers in the market for car finance today to start with the establishment fee, if any. “Write down any establishment fees, followed by any administrative fees, like monthly account-keeping fees, or broker (or dealer) establishment fees. Add the establishment fees to the total regular administrative cost of the loan. If there’s a monthly account-keeping fee, multiply that by the number of months in the term. Then take the regular repayments, and multiply that by the number of payments. If it’s a five-year loan with monthly repayments, take the monthly payment and multiply by 60 – the number of months in five years. “What you’re doing here is assessing the total, cumulative cost of each car loan. So add up the total payments and then add the total fees. That’s what you’ll be paying.”
Jones says it’s a great idea to consider seriously whether you intend to proceed until the full term of the loan, or if you will be disposing of the car earlier than that. If you think early disposal is a real possibility, then you need to investigate how early repayment fees or penalties (if any) are built into the contract. “Some loans with low establishment costs aren’t really all that profitable for the lender, at least initially, which is why in those cases the early discharge fees can be on the hefty side,” Jones advises. “It’s important to consider how likely it is that you really will go full term with the loan because that cheap loan you sign up for initially can get fairly expensive if you decide to upgrade your vehicle at some mid-point in the term.”
Jones says, like every other consumer product, car finance is a highly competitive business. Different lenders compete aggressively for your car finance repayments. One of the most effective marketing tools available to the car finance sector is the promise of a low interest rate – it’s enough to secure the deal in many cases. However, if you want to be an effective advocate for your own financial self-interest, the expert advice is that you need to consider the likely total cost of every loan. If that low rate seems almost too good to be true, it almost certainly is.