Why would you finance a car?
Are you struggling with transport? Perhaps you are spending too much money on vehicle repairs and maintenance? Or has your trusty old car finally given up the ghost? The New Zealand car finance market is enormous, with various flexible arrangements shaped around your particular situation. Investing in an older vehicle may save you money in the short term but can be more expensive in the long term. So what are your options? What are the benefits of financing a car?
In this article, we will look at the structure of car finance loans in New Zealand, the degree of flexibility and the all-important subject of collateral. Here at Crester Credit, we offer a range of flexible car finance deals, looking beyond your credit rating with a greater focus on security. So, why should you even consider buying a car on finance?
Standard of vehicles within your price range
Since you are financing your car over a period of time, in theory, you should be able to spread your net a little wider, perhaps taking in better quality/more expensive vehicles. You tend to find that older cars with significant mileage on the clock are cheaper and perhaps tempting. In many ways, this can be something of a false economy as the older the vehicle, the more likelihood of significant repair and maintenance costs.
Of course, you will come across bargains, vehicles that have been well maintained and may not require as much repair and maintenance investment as other older vehicles. However, you tend to find that this type of older reliable vehicle is few and far between. As a rule of thumb, the older the car, the more chance something will go wrong.
When using finance to acquire a car, this should improve the standard of vehicles within your price range. In theory, assuming all things are equal, the more modern the car, the less likely too many things will go wrong. However, you must carry out regular services and repairs to your vehicle. Skipping a service or delaying a repair may feel like you are saving money but could prove extremely costly in the long term!
Repayment terms
The repayment terms for any car finance will be directly related to your financial situation, security and ability to pay. There are two basic options which are:-
• Secured vehicle finance
This type of car finance will require a deposit with the balance made up by secured vehicle finance. For example, the car finance element may cover 50% of the wholesale value, with the additional element required as a deposit. The vehicle will be used as security, retained by the finance company and released into the owner’s name once the finance has been repaid in full. In the event of default, the car would be sold with proceeds used to repay the outstanding debt.
• Personal loan
The main difference with a personal loan is that you can raise funds to cover the entire purchase cost, in theory, assuming your finances support the loan. You would likely need to pledge security. Many people use the vehicle in question or introduce a guarantor to the mix. The amount raised via a personal loan to acquire a car is, in theory, more flexible than secured vehicle finance.
While there is a temptation to pay back your vehicle finance as quickly as possible, it is crucial to ensure this is affordable. There is no point in pushing your finances to the limit when you could extend the loan period by a relatively short time, reducing payments and pressure.
Fixed monthly payments
Whether you look at specific car finance or the personal loan option, monthly payments will be fixed when you sign your agreement. This means that you can budget well in advance with potential savings on car efficiency and repair and maintenance costs. As we touched on above, newer vehicles tend to be more efficient than their older counterparts, but there are some exceptions to the rule. If in doubt, it may be helpful to take an expert to examine the vehicle before purchase.
Many loan companies will offer the opportunity to make additional repayments as and when you have excess funds available. This is something of a double-edged sword; while the finance company would receive reduced interest payments on loan funds, the amount of money at risk would also fall. You tend to find that most car/personal loans are relatively flexible, although it is essential to ask the question.
Optional deposit
As we touched on above, there are two main ways in which you can raise finance; secured vehicle finance and a personal loan. First, you will need to make a deposit using secured vehicle finance, although this is not necessarily the case with a personal loan.
When considering putting down a deposit on your vehicle, there are several issues to consider, such as:-
• Cash flow
• Affordability
• Impact on finance interest rate/terms
Balancing the cash flow/affordability factor against any potential improvement on finance interest rates/terms will depend upon your specific situation. Again, as we have mentioned above, it is important not to overstretch your finances to the point where you may face financial problems further down the line. If uncertain, pay the minimum deposit required for the specific type of finance.
The car can be used as security
Whatever type of loan facility you are using to raise finance for your car, you can use the vehicle as security. Even though cars are generally seen as a diminishing asset, i.e. they fall in value the longer you hold them, they can still be helpful as security. In a worst-case scenario, it would at least guarantee repayment of an element of your outstanding loan in the event of financial troubles. In this scenario, you would still be liable for the remaining debt.
You may also find that using your car as security, and any other assets available (or a guarantor), may allow you to negotiate improved finance terms. Loan calculations are based on the risk/reward ratio; therefore, the lower the risk, the more chance of a favourable interest rate.
Warranty deals
When looking to acquire a car, there is the option of buying privately or through a commercial retailer. Even though you tend to pay more through a commercial retailer, any purchase would also come with an array of general consumer protections. These protections are not necessarily available when acquiring via a private transaction. This then brings us to the issue of warranty deals and additional cover.
If you buy a new car, they tend to come with a warranty typically offering cover for 36 months or a set mileage such as 36,000 miles. During this period, repair costs for everyday usage is covered, taking into account both parts and labour. Assuming you can afford a new vehicle, it is important to consider the potential savings delivered by a warranty. When inquiring about the car, you may also be able to negotiate a discount or several free services. If you don’t ask, you won’t get!
Improve your credit rating
While not a reason to consider taking finance to acquire a vehicle, car finance/personal loans can help to improve your long-term credit rating, assuming you keep up with repayments. This is another reason why the initial structure and duration of your finance must fit with your situation. It is always advisable to leave yourself some “headroom” in case you encounter financial difficulties further down the line.
In situations where you have stretched your finances to the limit, even a tiny bump along the road to financial freedom can knock you off course.
Looking at the long-term picture
Many of us will look back on the type of vehicles we purchased in our early days when funding was perhaps a little more complicated. While buying a so-called “run around” for a rock bottom price may have helped with short term finances, it may not be the case for the longer term. It is important to recognise that older vehicles with high mileage may be prone to enhanced maintenance and repair costs. Indeed, in theory, a more modern car should last longer and have reduced maintenance and repair expenses.
Where you can fund additional finance, on top of a cash deposit, this may be the perfect opportunity to look at a new or nearly new vehicle. We often fail to appreciate the added reliability which comes with new cars. This can be very important in both your working and private life.
Respect finance, but don’t be scared of it
The thought of taking on finance to acquire a vehicle may fill some people with dread. While it is essential to respect finance/debt, you should never be scared of it. Here at Crester Credit, as responsible lenders, we offer an array of flexible car finance deals and personal loans. Even though we will assist in maximising cash flow and security, it is crucial to know the boundaries of your financial resources.
As a loan company, we are positioned between the traditional banks and the high-interest payday loan companies. When it comes to car finance, especially where security is involved, our terms and conditions are highly competitive. We would welcome the opportunity to sit down, discuss your requirements in more detail, review your finances, and work out a sensible approach. It may also be helpful to discuss the pros and cons of used cars and new cars and how this may affect the terms and conditions of any available finance.
by Ash Horton
October 28, 2021
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.
