So you want to get a car. You’ve identified the one you want, and can already picture yourself driving around the countryside with the windows down. But even the modest Toyota Corolla, one of Australia’s most popular cars, will set you back at least $20,000 brand new. Not exactly pocket change, so if you’re only saving around $5,000 a year, it could take around four years to save up that money. Of course, it might take you less than that if you earn more or have better savings habits, but you get the idea; cars are expensive, and it’s difficult to just have tens of thousands stashed under your mattress. This is where car loans come in.
Everything you need to know about car loans
A car loan is a type of loan you take out from a lender in order to purchase a car, ute or motorbike. To give you a quick summary of how a car loan works, you borrow money from a lender to buy a vehicle. Over a set period of time (the loan term), you will pay back this money to the lender plus interest. Car loans are a useful option to have, as you don’t need to have the full value of the car in cash in order to drive away in it. Let’s take a look at how this works:
Car Loan Example: Jake gets a new ute
Jake has always wanted a ute, and has his eyes on a Toyota Hilux, Australia’s most popular car model. He finds a new one available for $30,000 at his local dealership, and decides to speak to his lender about getting a car loan. He wants to buy the ute with $5,000 of his savings and a $25,000 car loan. After reviewing his reliability as a borrower, the lender agrees to provide Jake with a $25,000 car loan at an interest rate of 5.00% p.a, for a period of five years. His car loan repayments will be around $472 a month. There is also an upfront establishment fee of $400. Jake buys the ute and drives away with it. After the five years have passed and Jake has paid off the loan, he will have paid a total of $33,707 for the Hilux, which includes:
- $5,000 of his own savings
- $25,000 car loan
- $400 car loan establishment fee
- $3,307 in interest
He will have also paid thousands over the years in other car-ownership costs such as maintenance, fuel and insurance.