When you’re looking for car finance to purchase a car, you will come across a lot of financial detail. One way to make your decision-making process easier is to ensure you understand the car loan terminology before starting out. Doing so can prevent you from making decisions that aren’t in your longer term financial interests.

The ups and downs of interest rates

As most people know, you will have to pay interest on the amount that you borrow. Expressed as a percentage, the interest rate is linked to the country’s economic performance and the rates set by the Reserve Bank. For loans in general, interest rates can be variable or fixed, but for car loans, they are nearly always fixed. This means that it will stay exactly the same throughout the lifetime of the loan, so that you are able to budget accurately.

Comparison rates show the true cost

With interest rates, it’s usually a case of the lower the rate, the better the deal. For this reason, it’s easy to be immediately attracted to the lowest percentage you see. However, the fact is that car dealers and finance companies are often relying on you doing just this. In reality, a very low interest rate may be balanced out by hidden costs elsewhere, meaning that you’re not saving at all.

This is where a comparison rate comes in. This is a calculation that takes not just the interest rate, but the fees and other charges linked to the loan, and converts them into a single percentage. This enables you to see the true cost that’s involved. So when you see loans advertised with two rates in the details, always check the comparison rates.

Secured and unsecured loans

Car loan providers usually offer secured loans, as these are lower risk for them. Basically, the car itself is the security, so can be repossessed if the loan repayments aren’t made. As this type of loan is lower risk, the interest rates and monthly repayments are usually lower and therefore more attractive. Unsecured loans are also available, but because they are riskier for the lender, you’re required to provide more documents to show your ability to make the repayments.

Fees and charges make a difference

As already mentioned, loans come with all kinds of additional charges. Some of these are connected to the finance and should never be overlooked, as they affect the total amount of money you’ll need to repay. Always refer to the comparison rate and read the small print so that there are no grey areas.

The term affects monthly repayments

The final total of your loan will often be affected by the amount of time you take to repay it. Longer terms tend to come with higher interest rates, because the lender is waiting for longer to recoup their money. They will also cost you more due to the additional administration involved.

Be prepared

Your car loan decision is going to be a sound one if you fully understand what you are committing to. The more research you do about loan costs and the hidden costs of buying a car, the more likely your car buying experience will be a good one.