David Koch: Worried about car financing? It’s simpler than you think

Buying a car is a big deal and for most of us, it’s not something we can do outright with cash.

You know what that means — getting a loan. But it doesn’t have to be a stressful situation. If sorting out car finance leaves you scratching your head, don’t worry, I’ve got you covered.

Here’s how to get on the road without breaking the bank, or getting stung by hidden fees and high interest rates.

When it comes to car finance, you’ve got a few of the usual suspects (and some not-so-usual) to consider.

Dealer finance: Without doubt dealer finance is the most convenient option. You pick your car and sort out finance on the spot. But convenience can come at a price. While some dealers might have competitive interest rates, especially during EOFY sales or seasonal promotions, they may also be a bit dodgy with excessively high fees or conditions that lock you into specific services. Always read the fine print and don’t be afraid to negotiate (or walk away entirely).

Personal loan: Getting a personal loan from your bank or a lender gives you a lot more flexibility, but you might have to jump through a few extra hoops. The good news is you can shop around for a decent interest rate, compare fees and even pay off the loan early if you come into some extra cash.

Novated lease: A novated lease is a three-way deal between you, your employer and a finance company. Don’t worry, it’s a lot simpler than it sounds. Your employer makes payments directly from your pre-tax salary, which can be tax-effective and convenient. Just be aware that if you switch jobs, you might be left managing the lease all on your own.

Green car loans: If you’re thinking about going electric, green car loans are well worth looking into. They usually have pretty low interest rates to encourage eco-friendly choices and, with the growing trend of EVs around Australia, more lenders are jumping on the green loan bandwagon.

What to consider before making a decision

Your No.1 consideration is the interest rate you get. It can make a huge difference to how much you end up paying over the life of the loan. Even a minor percentage difference can add up to thousands of dollars over a few years. Always compare rates from a few lenders and trust your gut.

Then there’s the loan term to think about. The longer the term, the lower your monthly repayments, but the more you’ll pay in interest overall. A shorter loan term means higher monthly payments but less interest accruing in the long run. Find the sweet spot that suits your budget without overstretching yourself.

Also check for any “hidden” expenses, such as loan-establishment fees, penalties for early repayments or ongoing fees to manage your account. These can add up and make a seemingly good deal much less attractive.

Finally, be aware that some finance deals include a balloon payment at the end of the loan term, which is a large, final lump sum. While it can definitely help lower your monthly repayments, you’ll need to make sure you have the cash (or a plan) to pay it when the time comes.

Crunching the numbers on EVs vs petrol & diesel

You’ve got so many choices these days with cars, so make sure you look at more than just the sticker price. Earlier this year I shared some research from Compare the Market (of which I’m economic director) on the financial reality of owning an EV.

In cities like Sydney and Brisbane, eco-friendly drivers save between $897 and $1536 annually on running costs compared to petrol car owners.

Yes, EVs tend to be pricier upfront, but the savings come out in the wash via cheaper fuel (or charging) costs and lower loan repayments — thanks in large part to the discounted rates on green car loans. We’ve even seen some interest-rate differences of up to 2.47 per cent, which can translate to hundreds of dollars in savings every year.

But it’s not all smooth sailing with EVs, at least in terms of insurance and repair costs. There’s a big difference in average comprehensive cover costs between EVs and petrol cars in both Brisbane ($563) and Sydney ($591).

The verdict? EVs are likely to be more cost-effective in the long run, but be sure to factor in all the costs — including insurance — before making a decision.

Four tips to getting the best car finance deal

Shop around: Don’t settle for the first offer you get. Compare options from banks, credit unions and online lenders.

Check your credit score: A good credit report can mean you’re able to lock in a better interest rate. If the numbers aren’t great, think about waiting a few months to improve it before applying for a loan.

Get pre-approved: Just like with home loans, getting pre-approval can help clarify your budget before you start shopping for cars. It also gives you a bit of bargaining power at the dealership.

Never outspend your budget: Work out what you can afford monthly, including things like fuel, insurance, repairs and annual servicing. Don’t forget to account for potential interest-rate changes if you choose a loan with a variable rate.

Whether you’re eyeing up a shiny new EV or sticking with a petrol model, make sure your finance deal supports your budget and future goals. Happy car hunting!

Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.