Take a ride with us while we compare vehicle loans in New Zealand.

Whether you’re buying your first car, your trusty steed is on its last legs, or a shiny new toy has caught your eye, vehicle finance could help you to buy your next car – or motorcycle, or boat for that matter. Buckle up and we’ll explain what vehicle finance is, what the different types of loans are, and which traps you should be aware of.

What exactly is vehicle finance?

While some people buy their cars in full, up-front, you may choose to get a helping hand in the form of a car loan. You can apply for a loan from a bank, through a car dealer or other lender, like a finance company. Once your loan is approved, you’ll receive a lump sum of money, which you can use to buy a new or pre-loved car or your seller is paid directly. Over time, you’ll make scheduled payments until your debt is repaid in full, with interest. The interest means that you will pay a bit more in the end, but the bite-sized payments can make the overall purchase more manageable, especially if you need to buy a car urgently or get a more expensive vehicle.

How do car loans work?

There are a number of different kinds of car loans, which we’ll get into a bit later, but the process is generally the same for all of them:

1. You apply for the loan.
2. Your loan is approved, and the lender sends you an offer of finance.
3. When it’s an unsecured personal loan you receive the money and shop for your car, alternatively, a car loan directly pays out to the seller in return for your vehicle.
4. You pay off your debt with interest.

Setting the best car loan terms.

The aim of the game is to get a low interest and low fees vehicle loan. It’s a good idea to use a tool to compare a few before you make any decisions as you might have to kiss a few frogs before you find the lender that’s right for you. Before you sign on any dotted lines, it’s important that you understand each term of the loan you’re agreeing to.

• Interest rate: This is the percentage you’ll pay on top of the car loan per annum. While it may seem like a small number, interest can add up over time, so it pays to do the Maths. Our car loan calculator might be able to help with that.
  
• Loan period: This refers to how many years it will take to pay back your debt.
  
• Repayment amount: This is the amount you will pay back weekly or monthly.
  
• Fees: There may be annual fees, charges for late payments, and possibly even charges for repaying your loan early.
• Insurances: Some loans require certain insurance policies to be taken out for the vehicle (learn more: https://thelendingpeople.co.nz/insurance)

Knowing your loan options.

When it comes to buying a car, there are many roads you can go down to get a loan, each of which has its own set of pros and potholes.

Secured car loans.

With this type of finance, the car you buy becomes collateral, secured against the loan. If you fail to make the payments, the lender has the right to repossess the vehicle. The good news is you’ve got a good shot at being approved. These loans tend to be easier to get as there is minimal risk for the lender. Another upside of these loans is that they usually have higher borrowing limits and lower interest rates.

Unsecured car loans. As you’ve probably guessed, these loans don’t require an asset as security. If you are unable to repay the loan, the lender can’t take the car (at least not immediately) – instead they will chase you for payment via a debt collector like BayCorp. Your credit rating plays a much bigger role when applying for an unsecured car loan as it’s a whole lot riskier for the lender, and with that increased risk comes increased interest rates.

Unsecured personal loans.

If you’re unable to get a secured car loan, you may be eligible for a personal unsecured loan. Personal loans tend to have more flexibility around repayments; however, they will probably have higher interest rates.

Extending your mortgage.

If you’re a homeowner, you have the option to extend your mortgage or get a revolving credit loan, which is a bit like an overdraft. The benefit of a revolving credit loan is that the credit limit is there for you to tap into whenever you need it. There aren’t any set repayments dates, so you pay back as much as you want when you want. Another bonus is that the interest rates will be the same as those on your mortgage, which tend to be lower than car loans and personal loans. Evaluate carefully if this is the best option for you first. Adding the cost of a car to a mortgage and not pay it off for many years, will end up costing a lot more in interest overall than compared to paying off a car loan in one or two years.

Where do I go to apply for a car loan?

Banks, car dealerships, finance companies – there are a few places you can visit to try and get an NZ car loan. Let’s explore, shall we?

Banks and credit unions.

If these guys give you the thumbs up, they’ll give you what’s known as car loan pre-approval. That means they’ll tell you in advance how much you can borrow. The number they give you is the maximum limit; you can choose to borrow less.

Brokers and Advisers.

There are some clear advantages to using an adviser as they are regulated (Lending People are licensed by the Financial Marketed Authority) to provide digital and personalised advice. Their goal is to find you the best lender for your situation. Because it is competitive your adviser works for you and often there are small or no fees.

Car dealerships.

When you finance a car through a dealership, it’s called dealer finance. If you’re in a hurry, this is a very quick car loan that can usually be approved on the spot as you’re buying the car. It’s worth noting that this finance option is normally only available for new car purchases.

The dealership will arrange your loan with a third-party lender that they’re affiliated with, so you enter into a contract with both of them. The benefit of a car dealer’s loan is that the lender will be bound by the Consumer Guarantees Act, so even if the dealership goes under or doesn’t come to the party on an issue, the lender is obliged to sort it out.

So, what about the interest rates? Dealer finance interest rates are often negotiable, so you might be able to get them quite low depending on your haggling prowess. Be warned, often there will be an additional lump sum known as a “balloon payment” that you’ll have to pay at the end of your loan term.

Finance companies.

There are loads of different finance companies you can approach for a vehicle loan, from more traditional banks to customer-owned and online lenders, most of which offer loans for both new and used cars. Their approval process can take a bit longer, sometimes up to several days. But if you like a bit of flexibility – this could be an option for you.

Many lenders offer you the freedom to switch from a variable to a fixed interest rate. Variable rates are subject to the rise and fall of the economy, so when general interest rates are low, yours will be too. But if interest rates start to rise – you guessed it, yours will do the same. A fixed rate won’t change, regardless of what the economy is doing.

A lot of these lenders will also allow you to refinance, meaning you can change the terms of your loan to be more competitive or change the frequency of your repayments.

Some tips and traps to look out for.

A loan is a commitment that shouldn’t be taken lightly. Before you make any decisions, have a read of these caveats that are commonly overlooked.

• Interest rates and fees: Most loan contracts have additional fees in the small print, which come into play in irregular circumstances. These include initial set-up costs, known as loan establishment fees, charges for defaulting on payments and penalties for paying off the loan early, which are called break fees.
  
• Repayment frequency: Many Kiwi car loans have fixed monthly or weekly payment schedules. If you think you may want the freedom to make extra payments, be sure to check the terms of your agreement.
  
• Additional costs: Don’t forget that cars also require insurance, a WOF and registration, petrol, diesel or electricity, servicing and sometimes unexpected repairs. All of these are added to the cost of the actual vehicle, so make sure you have an understanding of the total cost of car ownership before you go shopping.
  
• Car insurance: If you have a secured car loan, motor vehicle insurance (MVI) is compulsory. Regardless, protecting yourself and your vehicle with car insurance is the best way to avoid a hefty bill in the unfortunate event of an accident. MVI covers fire, theft and collisions whether it’s your fault or not. Depending on the level of insurance you sign up for, you may also be covered for windscreen repairs, transport, accommodation and towing costs.
• Mechanical breakdown insurance (MBI), also known as the mechanical warranty is different from MVI, but can be just as valuable. Within reason, MBI covers the repair or replacement of mechanical and electrical parts that break down during everyday use. Unlike MVI, the faults don’t have to be caused by an accident to make a claim. Policies are available for 12, 24 and 36 months and come with AA’s roadside assistance.

If you’re in the market for a new whip and think vehicle finance might be a good option for you, see what you could get through our online car loan application. It’s free to apply and you’ll have your answer in 60 seconds. Our experts are on hand to assist you if needed or offer you financial advice.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policies. Information on the blog does not take into account your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans, insurance. Find out more about The Lending People and how we may be able to help you.