Why The Best Car Loan May Not Be The Cheapest

When you are researching the best car loans, you'd better be prepared to do a lot of comparisons before you come to a final decision

. Every lender has their own particular criteria and some will try to appeal to particular market niches that may not suit every borrower. The global financial crisis has seen a contraction in the amount of money available and for this reason competition is not as keen as it once was.

It's a good idea to visit a bank, credit union or finance company and explore your options before making a final decision. Surprisingly, many people are happy to rely on a car dealership to provide them with suitable finance. Whilst dealerships may advertise some attractive deals, you should bear in mind that they are usually acting as an agent of a finance company or other lender and will usually factor in some sort of profit for themselves.

The only way to work out whether a loan is the cheapest is to add up the total cost of the loan over its nominated term, inclusive of application fees and any ongoing monthly fees that may be payable.

For example, a $20,000 car loan over four years at a normal interest rate of 11% will cost $512.22 per month. If the application fee is $150 and there is a $5 monthly account keeping fee, the total cost over four years will be $24,976.56. The same loan at 11.5% with no application fees or ongoing fees will cost a total of $24,807.71.

This means that the loan with the higher rate of interest is actually $168.85 cheaper over the four years.

This is the type of analysis you need to be aware of so you can make the best decision.

But, this does not always mean that the cheapest loan will be the best for you. If, for example you know you are likely to receive a good pay rise in the next year or two or that you have a good chance of acquiring a large lump sum then you need to be aware of any early repayment fees that might be payable.

In some cases a lender will insert a clause requiring you to pay an early repayment fee which could cost you a substantial amount of money. By choosing a loan with a higher rate of interest it might be possible to avoid the early repayment fee and save yourself some money in the process.

That's why it's important to examine all the conditions of the loan before you make your final decision, and only choose the one that suits your personal circumstances the best.

Low interest rate car finance might be attractive at first, but if there is a sting in the tail somewhere in the conditions, you could easily be better off choosing a different type of loan or lender.

The important thing to remember is to take your time and look at all the possibilities before making a final decision.

by: Craig O'Shannessy

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