The truth about cheap car loans.

March 09, 2013
Ian Robinson

EVERYONE loves a new car, right? Quite often the lustre of a new car fades quicker than the back of a rear seat headrest when it finally becomes knowledge that the price of that car is not the same as many others may have paid who you have spoken to around the BBQ plate.

Many people get sucked in to the 0% finance deals being offered on new cars only to find that they were either duped into paying 'rack rate' for the car (plus more) or did not get as much for their trade-in as it was really worth. Let’s face it, didn't your mother always tell you that there was no such thing as 'something for nothing'? Of course she did!

Hey, there IS such a thing as zero percent finance and it is alive and kicking in the new car game at the moment but there are a few tips that you may care to digest before diving feet- first into the pit of car finance to be consumed by tricks and the lure that are employed to sink you into that fresh leather seat. Why are car loans traditionally more than mortgage finance, if I can get a house loan at 6% then why do I need to pay 8% plus for my vehicle, a brand new piece of high performing engineering that I love probably more than my house? The answer is that a new car depreciates a lot more than a house, very quickly in fact and lenders who loan against them are taking a risk that their investment is travelling down the road shortly after you buy it with little dollars falling off onto the asphalt. Car loans also are shorter term and the loans are not viable at tiny interest rates from a profitability perspective. So any car loan would need to be at the higher rates for security of the loan and for profitability of the loan, otherwise no-one would do them.

Enter into the car sales boardrooms a few years ago when one bright spark heralded a great new advertising initiative...the no/low finance option. It soon became very popular from new car makers and salespeople and the public alike as a way to get a new car with no or very low interest - and why not, right? Wrong!!!!

If the going rate for a car loan is in the 8's then how are they going to make money from a rapidly depreciating asset? The answer is obvious, they trick you into believing that you are getting a great deal on finance, but it comes at a big expense. Quite often you will be unable to negotiate the price of the car, which will most likely be 'loaded' to compensate for the lack of profit in the loan, you will more than likely be restricted to a 3 year term which will mean enormous repayments anyway that will very quickly sap your enthusiasm for the carefree motoring ways.

And unless you are very switched on about car prices you may find that the balancing act of trade-ins gets you on the other side where you may think the price of the new vehicle is OK, but what you may not know is that you are not getting the correct value for your trade - that is another way of cooking up the price to compensate for the lack of mark-up in the financing.

Best thing is to shop around for a cash price, even if you don't have cash! Do the rounds negotiating the best you can by telling the salesperson about your cash buy. You will most likely be amazed at the difference in price you can get. Then even if you have to get a normal car loan at 8% interest you will be surprised to know that you will be in front, and not embarrassed around the BBQ plate when people won't then say laughingly, "you paid WHAT for that car?".

Car loans are another thing I do, so call any time.

Posted in: Car loans & leasing

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