Tips for applying for car finance

Chances are that when you’re buying a car, you’ll need some form of financing to help pay for it. Here are some tips that should help smooth the process a little.

Note that in this piece we’re not going to discuss the different types of financing that are available, that will be the topic of an upcoming article.

First things first, it’s a good idea to figure out how much you can afford per month. When crunching the numbers, be conservative and give yourself plenty of financial breathing space because life has a funny habit of throwing up tricky challenges from time to time.

For example, a job could be lost, someone in your family could fall ill, interest rates could go up, your family could grow in size or that banana plantation that you invested in isn’t quite the sure-fire bet that you thought it was.

Don’t forget to factor in all the other things you’d like to save for or regularly spend money on. It’s no good having a luxury car in your driveway if what you’re really pining for is a trip overseas or you have to subsist on bread and water for a few years.

Online calculators can help extrapolate the amount you can service per month into the total cost of the car you can afford.

Prior to talking to finance companies, it’s a good idea to get all your paperwork in order, including your tax returns. If you’re a private buyer â€" that is, you’re not purchasing on behalf of a company â€" you’ll need to supply items that prove your income, such as payslips and bank statements.

It’s also a good idea to check your credit history. Credit reporting agencies, such as Veda, D&B and Experian, allow you to pull your credit file for free once per year. If there any significant black marks against your credit, it may have an impact on the amount of money you’re able to borrow and the interest rate that you’ll pay.

Next you need to find a finance provider. As always, shop around and compare the products offered by different companies. It’s usually a good idea to source your loan independently from the dealership where you end up buying your car. Doing so allows you to get the best deal on both the finance and the vehicle.

As with home loans, weighing the relative cost of competing financing options isn’t just about comparing the interest rate. Calculations should always take into any account keeping fees, establishment costs and other sundry charges. A loan with a lower interest rate, but with higher fees could end up may end up costing more than product with higher rates and a lower fee structure.

If you opt for a balloon or residual payment at the end of the loan period, don’t set it too high. It may help to reduce the monthly payments, but if you’re overly aggressive it could lead to problems down the track. For example, if you’re planning on getting a replacement vehicle at the end of the financing period, and the residual payment is higher than your car’s resale value, you’ll be out of pocket.

It’s also good to make a note of any penalties or fees related to early payment or termination.

Before you head into a dealership, Richard Kew, director of Premium Direct Finance, notes: “You should get pre-approval as it provides you with bargaining power. Additionally, it’s good to know what your maximum spending amount is, so you can offer the dealer a quick sale and angle for the best price.”

Be aware that for car financing products that you’ve sought out yourself there’s generally no cooling-off period. Once you’ve signed on the dotted line, you’re committed.