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Understanding car loans and finance

Last updated November 11th, 2016.

Update: December 17, 2015

Since this original post was written, interest rates in New Zealand have continued to fall. This is great news for borrowers. If you are looking to borrow for a new car now, we can offer interest rates from just 9.95%.

While 9.95% is the lowest rate for car loans for several decades in New Zealand, it is still tempting for some people to try to get an even lower rate by rolling their car loan into their mortgage, where rates are now under 5%. But remember, when you add your car loan to your mortgage, you will be paying it off for up to 25 years, long after you have sold the car. So it’s usually wiser to have your car loan as a separate loan and pay it off in 60 months or less.

For most kiwis, their car is the second most expensive item they are likely to buy, after their house. While it’s always a good idea to pay cash for a car if you can, the reality is that most people need to borrow a certain amount of the cost of their car, in order to buy a vehicle of a high enough standard that it will be reliable.

For example, if you have only $2000 in cash, you could go out and buy a $2000 car. But the chances are, with a vehicle of that price, you will end up spending a lot of additional money in repairs over the coming months. It usually makes sense to borrow money at the best interest rate you can find, and buy a car that costs a bit more but will save you money in the long run with trouble free motoring.

A car loan allows you to spread the cost of the car over an extended period of time – normally between 12 and 60 months. The length of the loan is up to you. it depends how much you can comfortably afford to pay each month. If you spread the loan over 60 months (5 years) the monthly repayments will be lower but the total cost of the car will end up being more than if you paid it off over, say, 24 months. This is due to the fact you are paying interest rates over a longer period.

As a side note, some people will recommend you add the cost of your car to your mortgage. While this sounds appealing in terms of lower interest rates and repayments in the short term, you will end up paying more in the long run, and will almost certainly be paying for your car long after you’ve sold it. So in most cases in makes sense to take out a separate loan for your car and pay it off over a maximum of 5 years.

With any loan, the total cost of repayments will be more than the amount you borrow. That’s why it is important to shop around for the best interest rates. And also look at the fine print to check for additional fees that are often included, such as arrangement fees and early repayment penalties.

Normally, in New Zealand a car loan is secured against the vehicle. This means if you are unable to repay the debt, the lender has the right to take possession of the car.

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