Golden rules drive car finance

ROB STOCK
Last updated 13:01 07/02/2013

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OPINION: The hardest thing about car finance is avoiding it. A strange and bold claim, but one that is nevertheless true. Offers of car finance are pretty hard to avoid when you are shopping for a replacement car.

Back in the mad, bad old days before the collapse of vehicle finance companies like Provincial Finance and Western Bay Finance screaming ads on the telly pumped "ninja" car loans - No Income, No Job or Assets.

Beneficiaries can, in some circumstances, still get loans, but for the rest of us an income and a pulse are the main requirements a lender will look for.

The first rule of car finance is that not all loans are created equally so anyone accepting the first loan they come across is making a cardinal error.

The two great costs of car loans (as long as you don't miss payments and start incurring punishing default interest and costs) are the application charges and the interest.

Application costs at the banks for a personal loan are pretty steep.

At Kiwibank, for example, the fee is $275 for a car loan, but with a winning smile and a hard nose, people are often successful in getting banks to waive fees.

Interest varies, but the range at Kiwibank runs from 12.99 to 18.99 per cent depending on who you are and the security you may choose to pledge.

I tend to think of the AA vehicle finance costs as being a national standard, and their rates start at 10.95 per cent, but the "start at" or "rates from" advertising formulations are a trap for the unwary.

You can't assume you'll get the lowest rate and many lenders don't shout about their top rates, which can easily top 20 per cent.

Far lower rates are often available to new-car buyers through finance companies associated with the brand of car you are buying, but that tends to be for newer, more expensive cars.

For those with a house, there is another option: top up the mortgage.

While that might seem a no- brainer, unless you pay it off quickly, that $9000, $18,000, $25,000 or whatever will be structured to be repaid over the remaining period of your mortgage which means paying less interest for far longer.

The second great rule of vehicle finance is that the wrong place to get a car loan is at the dealership when you are shopping for cars.

It's too easy to fall prey to emotion and slick salesmen as weekly/fortnightly/monthly repayments make large debts sound manageable.

Arrange finance before visiting the showrooms, or Trade Me, or print ads.

You can explore repayment options and time frames in calm and peace at home (check out the "get into debt" calculator at the Sorted.govt.nz website) without that lovely, shiny vehicle gleaming at you appealingly.

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Start at your own bank, building society or credit union. AA members should always give the AA the chance to beat the bank to the deal.

The third great rule of car finance is never, ever, go guarantor for a youngster on a vehicle loan, particularly if the financier invites you to pledge your house as security.

The woe that can follow is just not worth it. Tales of people losing their homes because their irresponsible young rellie fails to make repayments on a car they can't afford are just too horrible.

DON'T...

- Accept the first offer of finance

- Go shopping for a car without finance in place

- Buy on finance if you can possibly help it

- Assume that just because the finance looks cheap, it is

- Forget debt means risk

Rob Stock is a finance journalist in the Fairfax Business Bureau and money editor of Sunday Star-Times.

- BusinessDay.co.nz

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