Everything You Need To Know About Car Finance In NZ

Most of us rely pretty heavily on our cars here in New Zealand, we use them to get to work, for road trips on the weekend, and to run the kids around. Our cars need to be practical, catering to the family’s needs, but most importantly, they need to be reliable because no one wants to end up stranded on the side of the road!

Unfortunately, reliability usually comes at a cost when we are talking about cars. Which for many of us, means the need for vehicle finance when purchasing a car, especially if you need a replacement fast. But before you sign on the dotted line, it does pay to do your research and get a good idea of your options when it comes to financing.

What Is A Car Loan?

A car loan or vehicle finance is when you borrow money from a third-party lender to buy your car. The lender sets the terms and conditions for the loan and provides you with the funds to purchase the vehicle.

When entering into a vehicle loan agreement, there are conditions around repaying the borrowed amount, charging interest, and setting an agreed timeframe for the loan to be fully repaid. Signing the loan contract means you agree to these terms and conditions and will make the repayments at the specified times. Under some circumstances, it can be beneficial to consult a finance broker or advisor who specialises in comparing the interest rates and terms offered by different lenders to help you choose the option that suits you best.

Two types of car loans are commonly associated with vehicle financing in New Zealand; secured car loans and unsecured loans. Understanding these options in more detail is important for anyone taking out a car loan, as they can affect the buyer’s circumstances differently.

Much like property loans, secured vehicle finance loans require you to provide collateral. This means something of value that the lender can ‘repossess’ or claim if you fail to make the payments on the loan (for car loans, this is usually the car itself). Unsecured car loans do not usually require collateral but operate on a level of professional trust (credit scores, credit history, co-signers/guarantors, etc).

Benefits Of Car Finance

• Spreading The Cost. Car finance allows you to spread the cost of purchasing a vehicle over several months or years. This makes buying a new car more accessible as you do not need to come up with the full purchase price immediately. Finance is especially useful if your old car is suddenly out of action and you don’t have enough saved up for a new one.
• Regular Payments. For some people, the structured format of car loans can make budgeting easier. You make regular payments every month/week giving you the flexibility of owning a car without straining your finances.
• Greater Flexibility. You are able to change your car more frequently without having to save up for extended periods, generally speaking, you will also be able to afford a better quality, more reliable car.

Drawbacks Of Car Finance

• Higher Overall Costs. As with any loan, you will end up paying more overall. This is because you are paying for the use of the money now instead of having to save up and wait.
• Depreciation. Vehicles are known to lose value quite quickly. Depending on the amount of your loan, you may find yourself owing more than the car is worth, especially if you are paying it off over an extended period of time.

Where Can You Get Car Finance In New Zealand?

Vehicle financing options all have their pros and cons, so it’s essential to shop around and compare before making a final decision. Some of the main things to consider include interest rates, repayment timeframes and terms, additional fees and eligibility requirements. Depending on your circumstances, there are several car financing options available to you here in NZ, these typically include:

• Family Support. Generally most young people will exhaust this option first. Checking in with parents and family members to see if they are able to lend you the money for a car is likely the easiest and cheapest option for most. However, keep in mind repayments still have to be made on time, it is unwise to let owing money ruin your relationships!
• Dealership Finance. Most car dealerships in New Zealand will have some kind of in-house financing options, which will be presented to you when you purchase a car from their yard. Dealership finance is convenient as it combines the purchase and finance all into one, however it is highly likely you will be paying a premium for this service (higher interest rates than other lenders).
• Bank Loans. Much like property loans, you can apply for a vehicle loan from your bank, however these will tend to come with strict approval requirements and conditions as well as requiring a whole lot of supporting documentation. Traditionally, banks don’t tend to offer unsecured car loans and approval may be based on your current financial situation and history with the bank. Applying for a bank loan will take extra time, so get your application in way ahead of time.
• Finance Companies. These independent lenders typically offer convenience as their main selling point, making them an attractive option for those who need finance rapidly or want to buy a car privately instead of through a dealership. Car finance companies also have a higher degree of flexibility with whom they choose to loan money to, often offering the most competitive interest rates and flexible repayment terms.

How Do Car Loans Work?

Car loans are categorised as a personal loan, or individuals borrowing money from the lender. Much like all loans, this will come with terms and conditions requiring you to make regular payments on time at specified intervals.

The loan agreement will include terms and conditions including the amount borrowed, the repayment duration, any down payment you have made, the interest rate for borrowing the money, financing fees and penalties. Car buyers must clearly understand the repayment amounts and their frequency (weekly, fortnightly, or monthly). Some quick explanations of the terms we have mentioned are below.

• Total Loan Amount. The total amount of money you are borrowing (this may or may not include fees - check this before signing).
• Interest Rate. Expressed as a percentage, the interest rate is the amount of additional money you will pay based on the original amount of borrowed amount (principle), the interest rate will depend on the type of vehicle, the down payment and the loan term, among other things.
• Repayment Amount. The amount of money you will pay back each week/month.
• Down Payment. The necessary deposit required to secure car finance (the higher the deposit the better your chances of approval and lower interest payments).
• Loan Term. The timeframe for paying off the total loan amount, usually 1 to 5 years.

As far as the vehicle is concerned, you own it, but the loan company will likely have the right to repossess the car and sell it if you fail to meet the conditions of the loan contract. Put simply, the lender can take the car away from you if you miss payments (the vehicle is held as security against the loan).

The repayments you are required to make will cover both the cost of the loan, the interest charged and any financing fees. Generally, the purchaser sets the timeframe for full repayment in agreement with the lender, for example, 1 year, 3 years or 5 years.

Step-By-Step Guide To Organising A Car Loan

What is the process for getting a car loan and what do you need to know? Let's take a look below.

Step 1 Understand Your Finances

Before diving in headfirst, it is good to know roughly what you can afford. This will include a bit of math around your monthly income, expenses, any existing debts or financial obligations and how much deposit you have saved (10 to 20% is usually pretty standard). The purpose of this exercise is to make sure you can afford the loan and how much you can comfortably spend on repayments.

Step 2 Get Your Documents Sorted

All lenders will require certain documentation in order to decide if they will approve your vehicle finance application. Some of the most common loan documents usually include proof of income, a driver's licence/passport, proof of address, and your credit score (available from Centrix, Equifax or Illion credit reporting agencies). If you have these documents readily available it will speed up the application process.

Step 3 Compare Lenders

Interest rates and fees will vary from lender to lender, so shopping around is the best way to make sure you are getting the best deal. Look out for competitive interest rates, hidden fees, favourable repayment terms and whether or not they are open to negotiation.

Step 4 Apply For Pre-Approval

Before you make an offer on a car, getting pre-approval is an important step. Pre-approval gives you the certainty and freedom to buy with confidence, plus you are better able to negotiate the purchase price and stick to your price range.

Step 5 Choose Your Car!

Now for the fun bit - it’s time to choose your car! When searching for the right vehicle, some helpful things to keep in mind are age vs mileage, make and model, and ongoing maintenance costs. Take your time and ensure you test-drive multiple options before making your final decision.

Step 6 Finalise The Loan

Once you’ve found the right vehicle it is time to sign the loan agreement and get the payment through. Be sure to review the terms and conditions carefully, and don’t be afraid to ask questions if you are uncertain about anything. Now is also a good time to set up your automatic payments so you don’t miss any deadlines.

Step 7 Drive Away In Your Car!

After signing the loan agreement and making payment, it’s time to enjoy your new car! Don’t forget to arrange car insurance (this can usually be done over the phone or online).

Top 5 Car Loan Tips To Takeaway

Before committing to signing a loan agreement or contract, it is important to fully understand what you are signing up for and what your rights and responsibilities are as the borrower - being well-informed is the best way to avoid unfortunate circumstances. Here are our top 5 tips to take away when getting a car loan.

• Legislation Exists For Your Protection. Know your rights and responsibilities are under New Zealand’s Credit Contracts and Consumer Finance Act (CCCFA). This legislation provides consumer protection and sets out specific requirements for lenders when entering into credit contracts with borrowers.
• Always Read The Fine Print. Always read the specific terms and conditions of the loan agreement (make sure you fully understand what you are agreeing to!). If the loan includes credit insurance, extended warranties, penalties or repayment waivers, the lender must provide additional information on these add-ons. If unsure, it is good to ask around or have a lawyer take a quick look.
• Affordability Is The Key. Both you and the lender are responsible for assessing whether the loan is suits you and whether you can afford the repayments without facing financial hardship.
• Read The Disclosure Statement. The lender must provide you with a plain language disclosure statement outlining the details of the loan, including repayment expectations, interest rates and how they are calculated, consequences of default, any additional fees or charges (including early repayment charges) and the total loan amount (including principal, interest and fees).
• Understand Cancellation Rights. Under the CCCFA, you have the right to cancel the contract at any time if you did not receive a correct, complete and legible disclosure statement (provides borrowers with an extra layer of protection in the case of misinformation or non-compliance by the lender).

Ready to start looking for a new car or do you have one in mind already? CarMoney are the people to see for reliable and affordable motor vehicle financing, apply online or give us a call today.

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