Buying a new car is an exciting time but involves a lot of decision making for the buyer.
If you don’t have enough in savings to buy the vehicle outright, taking out a car loan is one way to get you on the road sooner. Deciding on the term of your car loan could make a big difference to the overall amount that you’ll pay for your vehicle – so don’t sign on that dotted line until you’re sure you can afford the repayments!
What difference does the loan term really make?
The decision to take out a short term car loan over a long term car loan (or vice versa) really depends on your individual circumstances. Recent traffic to the finder.com.au site has shown three-year car loans are the most popular among Aussies – and it’s easy to see why.
EDITOR'S NOTE: You're reading a story by financial comparisons website, Finder.com.au. We'll be bringing you a number of stories in partnership with Finder, giving you the benefit of expert insight from a team obsessed with the finer details of purchasing and owning a new car.
Let's consider an example: if you take out a $5000 car loan at an interest rate of 7% p.a. with repayments being made monthly, there will be a big difference in how much you pay each month and in total over the life of the loan. A car loan repayment calculator (link opens in new tab) can show us this variation:
- 3-year term: $154 in monthly repayments and $5544 over the life of the loan.
- 4-year term: $120 in monthly repayments and $5760 over the life of the loan.
- 5-year term: $99 in monthly repayments and $5940 over the life of the loan.
This example shows us that shorter term car loans are great if you can afford slightly higher monthly repayments. This also means that you’ll be in debt for a shorter period of time (winning) and you won’t pay as much interest! A three-year car loan would be beneficial if you have some bigger financial goals on the horizon (such as buying a house) and don’t want to be in debt for too long. Being financially disciplined is also important so that you can meet your steeper monthly repayments.
Longer term car loans
If you don’t think you can afford high monthly repayments, opting for a four- or five-year car loan will reduce the size of your repayments. This means that you can get the car you want at a more affordable price! The downside is that you’ll be in debt for longer and could pay significantly more in interest. If you’re in no hurry to achieve other financial milestones then a longer term car loan is a great option.
Secured or unsecured car loan: If your lender uses your vehicle as security for the loan, you’re likely to score a lower interest rate by simply registering their interest on the PPSR (new tab). This also means the lender can repossess and sell your car if you miss repayments. On the other hand, an unsecured car loan increases the risk for the lender, so you might pay more in interest.
Costs don’t stop at your monthly repayments: Cars also have some big ongoing costs such as insurance, servicing, repairs and fuel. You’ll also need to pay stamp duty and registration when you purchase a new vehicle. Make sure you factor in all these additional costs before deciding that you can afford to take out a car loan (new tab).
Cars are a depreciating asset: When deciding on the term of your car loan, don’t forget that cars depreciate very quickly. When it comes time to sell, you’ll only get a small fraction of what you purchased it for, so you don’t want to spend any more than you absolutely have to. You don’t want an asset with depreciating value to dictate all your financial decisions for the next three to five years!
It’s important for you to come to terms with you car loan term before making the decision to buy a car on finance. The best term for your car loan will ultimately depend on your individual circumstances but being well informed can help you to make the best decision possible.
As the Money Expert for finder.com.au - the site that compares virtually everything - Bessie is an experienced commentator who often appears on national radio, TV, and throughout online publications sharing her best money-saving tips and property advice. Bessie is passionate about empowering Australians to make better decisions, whatever it is they're looking for.