Is it just us or are your friends’ cars getting fancier every day too?
It’s not just our friends either. The neighbour, the uber driver, even the 17-year-old across the street… it seems they’re all rolling out of the driveway in luxe new wheels.
How are they doing it? Where do they find the money?
Easy answer: The bank.
Your new car (loan)
Despite appearances, it’s unlikely Prado Paul actually had the money to buy his new SUV outright.
And unless you’ve come into an inheritance or been diligently working your way to a big fat $30k, $40k or $50k in savings, the chances are you’ll need to get a loan from the bank to pay for the new car.
In this article, we’ll run you through what a car loan really means to achieving your savings targets, if it’s something you should be doing right now, and if it is, how to do it smarter.
Because now you know the secret to lust-worthy cars (Ask the bank! Easy!), it’s time to talk about the catch(es). Like:
- The interest rate
- Your future home loan
1. The interest rate
Banks and other lenders might agree to give you the money for your new car quick smart, but they might not give you a clear picture of the potential consequences that come with it. Consequence number one: interest rates.
The rates associated with personal loans, which is essentially what a car loan is, are sky high. The only real difference is that your car serves as collateral, meaning it can be seized by the bank.
So, high interest rates = high repayments. And these payments creep into your savings.
Repayment rate
Banks and other lenders might agree to give you the money for your new car quick smart, but they might not give you a clear picture of the potential consequences of your new loan. Consequence number one: your repayments.
The repayments associated with car loans are generally pretty high because they’re a big asset. Therefore they require a bigger loan, and that equals high repayment amounts.
Although the interest rate for car loans is generally considered low (in comparison to credit cards, anyway), the loan term and size means you’ll still have paid a good chunk extra in interest rates by the end of your loan.
For example, your repayments could look a little like this:
| Loan amount | Loan term / interest rate | Monthly repayment |
| $10,000 | 5 years @ 6.69% | $197 pm |
| $25,000 | 5 years @ 6.69% | $491 pm |
| $50,000 | 5 years @ 6.69% | $983 pm |
| $80,000 | 5 years @ 6.50% | $1565 pm |
*Based off a 6.69% interest rate with a 7.32% comparison rate. Rates correct as of 21 March 2023.
So, if you were to get yourself an $80k car loan, you’ll be paying an extra $13k in interest as a big fat thank you to the bank.
2. Your future home loan
Are you thinking about following that new car with a new home?
Consequence number two: the car-sized dent in your borrowing capacity.
Before granting you a home loan, the bank is going to look at any and all existing debt you have and take this into account when working out what they’ll lend you.
If you’ve still got a car to pay off, your savings and your wealth are reduced, and therefore the bank might offer you less money than you need to buy your home or refuse to lend you anything at all.
Bonnie’s wrap
We get it. You want the new home AND the new car. And as it’s so much easier to get approved for a car loan, our instinct is usually to tick that one off first.
But here’s the thing: it is going to make getting that second, chunkier loan even harder.
We’re not saying you can’t have both. But if the wheels you’ve got right now get you from A to B (safely and soundly of course!), then we recommend holding out for that new home loan first.
Otherwise, you might find you can’t have both after all.
I get it. You want the new home AND the new car. And it’s so much easier to get approved for a car loan, making that new car purchase even more tempting.
But here’s the thing: taking out a car loan is going to make saving towards your home loan even harder.
So, if the wheels you’ve got right now get you from A to B (safely and soundly of course), then I recommend holding out and making sure you’ve got your home loan approved and finalised first.
Keep in mind your money ‘why’ – getting into that home!
Oops, I already bought the car
This is one of the most common reasons home loan applications are knocked back but don’t worry, it doesn’t mean your home is out of your grasp forever.
The first thing we think you should do in the event this happens to you – or has already – is go see a qualified mortgage broker to find out exactly how much you can borrow now and how much debt you need to clear to reach the borrowing capacity you need.
Here’s an extra bit of advice from me: if your mortgage broker says ‘sorry, I can’t help you’ because they think you have too much debt, find a different broker. A good mortgage broker will take the time to properly assess your situation and provide the guidance you came to them for.
Wheels or no wheels, I’ve watched clients come back from all sorts of financial situations and into homes all their own.
And you can too. Here’s some of my favourite success stories of how your savings can benefit:
- One client sold their car and purchased something a bit less luxe to drive around in for a while.
- One jumped on a savings program to pay off a chunk of debt that was weighing them down.
- Another consolidated their debt into one, easy to manage repayment to reduce their monthly outgoings and boost their borrowing capacity.
- One couple refinanced their existing car loans to get a lower interest rate.
- Another sold one of their cars and shared the other for a while.
Start your own success story now and read our guide to creating a better relationship with your money here – it’s a goodie.
