Tips for your next car loan

April 17, 2019

Buying a car? Get your finance pre-approved

Securing finance for your new car through the dealership is easy. Produce your driver’s license and a few other documents and, before you know it, you’re behind the wheel of your new car.

But not so fast.

In the year to November 2018, Australians borrowed $8.1 billion to buy vehicles. That means “more than $1.4 million in interest is paid back on these new cars every single day. That’s around the same value as 39 new cars,” says Graham Cooke from the comparison site Finder.

Most of us don’t have a spare $30,000 lying around to drop on a car, so we need finance. But to prevent a severe case of buyer’s remorse, we take a closer look at the reasons why you should arrive at the car yard with pre-arranged finance with your broker.

Bargaining power

Walking into a car yard is not a fair fight. While you might purchase a car every five years, salespeople practice their selling techniques every day. Therefore, it’s important to go in knowing what you want before you step onto the lot.

Do your research. Set and stick to your price point. Know the recommended price and pre-plan your insurance and finance options. Going in with your money pre-arranged gives you greater bargaining power. With preapproval, you effectively become a cash buyer and there is no need to deal with the finance department.

Car sales are a study in psychology. There is the pressure to buy now – the so-called ‘impending event’ strategy that will convince you that the deal will disappear quickly.

Roll up, roll up!

Pre-arranging finance helps you to avoid a much bigger problem – getting sucked into a bundle of extras.

Both ASIC and the Royal Commission have been critical of the high-pressure sales tactics in car yards that force consumers to quickly make a decision on rolling up a range of products into one single finance deal including the car, the costs of the finance and insurances.

The Royal Commission has recommended a pause in the sales model so that insurance can only be offered at a different time to the sale of the car.

A particularly nasty practice was so-called ‘flex commissions’ where car yards were able to inflate the interest rate above that offered by the lender and were rewarded a handsome commission for their efforts. ASIC banned the practice in November last year.

Legal and regulatory requirements

The Royal Commission will shake up the car-lending industry. Recommendations put forward so far mean car yards who are involved in the lending process will not be able to operate without a credit license. There will also be a cap on commissions for add-ons like insurance.

But smoke and mirrors are smoke and mirrors; there is still the issue of conflict of interest in the financing of cars where the dealer is remunerated by the lender.

Having your finance prearranged means being able to tyre-kick at your leisure without the high-pressure tactics to get you into a finance package – one that serves the commission structure of the dealer over your needs.

Cars cost money to buy and run. There’s interest on any finance, insurance, registration and maintenance. The key to making a good purchase is being prepared and pre-approved. This will help you get the best deal and allow you to enjoy your new wheels.