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Car Loans

You borrow an amount of money that you have to repay within a certain period of time (called ‘the term’). You will have to sign a credit contract that specifies the amount borrowed and how you will repay it.

The term can vary, but is usually between 12 months and 5 years. If you don’t pay off the full amount of the loan by the end of the term, or if you can’t afford to make equal payments over the life of the loan, the final payment must be made as a lump sum. While this makes repayments affordable, you may be left with a large amount of money to pay off or refinance when the term ends.

Fixed and variable rate loans

If you shop around you can choose between a fixed or variable rate loan. In a fixed rate loan, the interest rate is locked in for the term of the loan. This means that your repayments will be set, so you know exactly how much you have to repay each month.

But if you make extra payments from time to time and pay out the loan early, you may be charged an early termination fee. You will also have to pay account fees and charges.

Secured loan

With secured loans you offer an asset, such as the car you are buying, as security for the loan.

If you don’t make repayments, the credit provider can repossess and sell your asset to get its money back. The age of your car will affect its resale value. If your car is sold for less than you owe, you will still have to pay the credit provider the difference.

Unsecured loan

Unsecured loans are typically taken out for used cars. You don’t need to offer an asset as security however you may not be able to borrow as much.

Interest rates are also usually higher for unsecured loans because the credit provider is taking a bigger risk. If you don’t repay the loan, the credit provider can take you to court to recover its money.