Car finance deals: what you need to know

There are even dealers offering “repayment guarantees” that provide cover if you buy a car but lose your job due to Covid-19 (see “Payment reassurance?”).

But, like any finance deal, the devil can be in the detail. There is usually a slew of fees when buying a car on finance and you’ll still pay hundreds in interest. If you can afford it, paying in cash is your best option. Having cash on hand, or a hefty deposit, also puts you in a stronger position to negotiate a discount.

How they work

Many big car brands have their own finance arms. Other dealers usually offer loans through finance companies such as Marac, MTF Finance or UDC.

With most deals, you pay an initial deposit followed by monthly payments over the agreed term – usually one to five years. The lender generally has a security interest in the car until it has been paid off. Depending on the dealer, rates can range from as low as 1.9 up to 17.5 percent or more.

Don’t assume you’ll be able to get the lowest advertised rate – what you’ll be offered will be influenced by your credit history. Customers with patchy records or bad debts will be considered higher risk and charged higher interest rates.

You’ll need to provide proof of income and agree to a credit check to see what finance you qualify for. Most lenders have minimum borrowing amounts.

As well as interest, you’ll typically pay a fee to set up the loan (called an establishment fee), which can be several hundred dollars. Some deals also come with monthly account fees. If you’re buying a new car, you’ll need to factor in on-road costs – that’s the cost of getting the vehicle registered and warranted.

With car dealers where the loan is arranged through a finance company, you may be up for a “broker fee”. This is what the dealer gets paid for being the go-between. For example, Marac loans arranged through a dealer can include a $500 broker fee on top of the $112 loan establishment fee. If you set up the loan directly with Marac, it charges an establishment fee of $229 but there’s no broker fee.

If you get into financial trouble and miss a repayment with any of these deals, you could be hit with default fees and penalty interest. Other charges typically apply if you want to make changes to the loan or repay it early. When you’re considering a deal, make sure to take these fees into account.

Add-ons add up

Along with your loan, the car dealer may offer extras, such as income protection insurance. These add-ons can be pricey and mean you’ll end up paying more for your vehicle.

Income protection insurance is intended to help cover repayments if you lose your job or become ill. However, it usually only provides cover for a limited period so you can still be on the hook for the debt after this time.

If the lender requires you to take out insurance, it should justify why it's needed.

Dealers may also try to sell you guaranteed asset protection (GAP) insurance. It kicks in if your vehicle is damaged beyond repair and the amount paid by your car insurer is less than the amount you owe on the vehicle. The insurance pays the difference.

However, it’s often very poor value for money. Research by the Australian Securities and Investments Commission (ASIC) found consumers got back as little as 6.3¢ in claims for every dollar paid in premiums.

Dealers can earn commission for selling insurance, a reason why it’s heavily promoted. ASIC’s research found Aussie dealers earned 8.2 times more in commission from GAP insurance than consumers were paid in claims.

Mechanical breakdown insurance is another common product offered by dealers. We don’t recommend this insurance because you can end up paying for cover you already have under the Consumer Guarantees Act.

Other options

Instead of dealer finance, you could arrange a loan through a bank, credit union or direct from a finance company.

In June, bank interest rates for personal loans ranged from 8.95 to 19.95 percent. Interest rates at credit unions ranged more widely from 9.90 to 28.90 percent while finance company rates were up to 29.95 percent. As with finance through a dealer, personal loans have set-up and default fees.

Instead of taking out a personal loan, you may be able to borrow more on your mortgage to pay for the car. However, while your mortgage rate will be lower than a personal loan rate, you’ll be paying the mortgage for a longer time.

This means you’ll be paying interest on your car for the entire mortgage term – likely long after you’ve sold the vehicle. If you decide to put the car on the mortgage, you should increase your repayments to pay off the car as quickly as possible.

Your legal rights

Under the Credit Contracts and Consumer Finance Act, lenders must tell you, in writing, the total cost of the loan. This is called disclosure and must include how much interest you’ll be charged and how it’s calculated, the cost of any fees, and what happens if you default or pay off the loan early.

Lenders’ fees must be reasonable. Last year, the Commerce Commission filed charges against UDC Finance alleging the company was charging unreasonable dishonour and late payment fees. An investigation of another car lender, Auto Finance Direct, resulted in the company repaying $460,000 in fees.

If the lender requires you to take out insurance, it should justify why it’s needed. It can only insist on insurance if it covers reasonable risks and doesn’t double-up on insurance you already have.

Once you’ve signed the loan contract, you’ve got a short “cooling-off” period when you can cancel the finance deal and the car purchase. This period is five working days after you get the required disclosure information. The time is longer if the information is emailed (seven working days) or posted (nine working days from the date mailed).

However, if you’ve already taken possession of the car, you’ll still have to pay for it, which may mean finding alternative finance if you haven’t got the cash on hand.

Payment reassurance?

“Hyundai Assurance” and “Toyota Reassurance” are guarantees offering extra flexibility if you buy a car but lose your job due to Covid-19.

For customers who purchased a car between 28 April and 31 July, Hyundai Assurance provides a six-month payment break if the customer loses their job in the first six months of the finance deal. The company pays the interest for this period. However, you still need to pay the full amount of the loan. You also have the option to extend the loan term to match the deferred period.

If you purchase an eligible new or used Toyota between 1 June and 30 September, the company will meet up to six months of your repayments (to a monthly maximum of $600) if you lose your job in the first six months of your loan.

However, if you still can’t pay after this time, the loan default process will start. If you’re struggling financially, you have a right under the Credit Contracts and Consumer Finance Act to make a hardship application asking the lender to restructure your loan.

Tip: Offered car insurance by the dealer? Shop around to see how prices and policies from other insurers compare. Premiums can vary by hundreds of dollars a year.