Five simple steps is all it takes to compare car loans – it could be one of the smartest (and easiest) investments you ever make
You really shouldn't look only at one factor when comparing car loans – but people generally focus heavily on the interest rate, right? They also occasionally focus on the required monthly repayment.
If you want to evaluate the true cost of your next car finance arrangement, you can do it easily, using the advice below.
What you really need to know is: What’s a particular car loan really going to cost, all up?
Let’s assume you have four different car loans in front of you – here, they all have to be for the same amount, with the same ‘balloon’ or ‘residual’ amount (if any). The only rock-solid way to compare them is to add up the total amount payable over the term of the loan.
Here's how to figure out how much that finance is really going to cost you:
FIVE-STEP LOAN COST CALCULATOR
STEP 1 - Establishment cost
List any loan establishment fee, plus any broker or dealer origination fees (if applicable).
STEP 2 - Regular payments
List the required regular payment (whether it’s weekly, fortnightly or monthly).
STEP 3 - Fees & charges along the way
Add any recurring fees (like monthly account keeping fees) to the required monthly payment.
STEP 4 - Calculate
Multiply the regular payment (plus fees, if any) by the required number of payments. (That is, multiply the monthly payment by 60 for a five-year loan paid monthly.)
STEP 5 - Combine
Add the amount from STEP 1 to the amount from STEP 4 – this is the all-up cost of the car loan.
Repeat this process with remaining loans to compare the true cost.
When comparing loans in this way, it’s essential to have the amount borrowed and the residual payment (if any) constant across all the loans you’re comparing. It’s also essential to keep the loan types the same (eg, all chattel mortgages or all car loans) because there are different tax treatments of each finance type – depending on your circumstances.
Incidental fees and charges have a major effect on how much the loan really costs you in total. You could easily find that a loan with high fees and a low-sounding interest rate might in reality cost you more than a loan with low fees and a notionally higher interest rate.
To be an effective advocate in your own interest here you should crunch the numbers on every loan offer you consider. This is the only way to ensure you are paying the lowest possible amount for finance.
You should also do the same comparison test on commercial car finance agreements.
The final thing to consider is early repayment penalties and charges (if any). Some low setup cost loans come with substantial penalties if you choose to end the agreement early. Consider your own situation carefully here because although it might be unimportant to you if it’s unlikely you’ll bail out early, it could add significantly to the cost if you do.