Top 5 Car Finance mistakes and how to avoid them

First on our list and the most common mistake when approaching car finance, not knowing your credit score. This is an essential first step as financial institutions use your report to assess your reliability to pay back your car loan. Not knowing your credit score for finance is like driving blind into finance options. 

When you know your credit score you’ll get a good idea of which loan terms and budgets you are looking at. If you discover you have a low credit score and aren’t in any rush, it’s worth considering improving your credit score before you buy in order to secure yourself a better deal come loan time. 

In Australia you are entitled to get a copy of your credit report for free every 3 months. It is recommended to get a copy at least once a year. 

Three of the most reputable credit checking agencies are below for you;

1. Experian 1300 783 684
2. illion 132 333
3. Equifax 138 332

Generally you will receive your report online within a day or two, in some cases you may have to wait up to 10 days.  Since different agencies can hold different information you may have a credit reports with more than one agency. 

Your credit report also includes a credit rating. This is the 'band' your credit score sits in (for example, low, fair, good, very good, excellent).

Most reports do NOT include your actual credit score, however some credit reporting agencies may provide your credit score for free — check with them directly.

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Avoid any provider that asks you to pay or give them your credit card details.

Empower yourself by reviewing your current financial situation and making sure you know exactly where you stand to ensure you can afford to pay back any new loan you will be incorporating into your future. If you don’t review your budget and financial situation you could end up falling behind on payments and jeopardizing your financial future. 

In fact late or unpaid car finance repayments may equate to thousands of dollars owed in interest and fees. More worryingly it will affect your credit score and harm your ability to take out a new loan in the future. 

Never fear, we are here to help you shed light on your current financial situation and work out your car payment budget. 

Here’s how to budget for car finance in three easy steps;

1. Calculate your current financial situation
2. Calculate your maximum payment limit
3. Calculate your future financial situation

Here’s more on each of the three steps above to get you budget planning like a pro. 

No. 1 Calculate your current financial situation is easy, simply download Moneysmart.gov.au's excel budget planner here and fill in the blanks! You will then have an idea of your left over disposable income available to service a new loan. 

Now calculate your maximum payment limit. The general rule of thumb is to spend no more than 10% of your monthly income on your car payments.  That means if your weekly take-home pay after tax is $1,000, aim to spend less than $100 per week on car payments. 

Then calculate your future financial situation. Revisit your budget spreadsheet and include your maximum spend limit for a car finance loan. 

How long can you afford to pay $400 a month? Try to aim for three-year loan terms for used cars and five years for a new car. Longer loan terms will reduce each monthly payment, however you'll find yourself paying more interest and therefore a bigger total bill overall. 

REMEMBER

The loan amount you're eligible for might not necessarily equal the price of the car you can afford. 

Once you determine an estimated car loan amount, you can begin to see a realistic purchase price. 

You can then check what you are entitled to through our Toyota Personalised Rates program here with our car finance calculator. While you're at it, check your borrowing power. Essentially, borrowing power indicates the strength of your financial position. It's a combination of the credit report, income, and down payment. 

Now it’s time to begin seeking pre-approval, do this from your top 2 or 3 lender preferences only. As seeking too many pre-approvals will negatively affect your credit score. 

Getting pre-approval on your car finance loan application is vital to avoiding common pitfalls. Seeking pre-approved credit will strengthen your position when it comes to negotiating your deal. 

Once you have applied your lender will offer you pre-approval or conditional approval, if you meet their criteria. However it’s important to note that if your financial situation changes or there are any major changes with the lender’s criteria it does not guarantee your will receive the car finance loan. 

Having a pre-approved car loan essentially means that you are able to approach your car purchase with a clearer confirmed idea of your financial situation, making it less confusing and and easier process for you.You will have a very clear idea of target price for your new car and a solid idea of what you can afford, saving you time on your journey. 

However keep in mind that if your financial situation changes your pre-approval will no longer be applicable. 

Now that you’re equipped with knowledge of your credit score, a beautiful budget and essential pre-approval it’s time to start thinking about what type of car financing you are after. 

Consider trading in your current vehicle to increase your down payment and total deal’s worth. 

One car finance product we are proud of is our Toyota Access product. We will guarantee your car’s future value so you can continue to enjoy an upgraded Toyota easily and affordably into the future. 

Let’s talk interest rates. You may think the lower the better, however be wary of 0% or very low interest rates and many times they are tied to higher account fees, exit fees, re-financing fees and payout conditions. 

Yes getting a lower interest rate does make a big difference long term, for example reducing your interest rate by just 0.5% can save you almost $1000 over the term on a $50,000 car loan. 

However it is pertinent to look past interest rates alone and evaluate all components of the deal for their long term applicability. 

One big pitfall we encounter particularly on leased cars or novated leases is rolling negative equity into a new car finance deal. Negative equity is when you owe more on your car lon than the car is actually worth and it’s known as being upside down. 

This is a common mistake we see through our dealerships. You may have been with your bank for years, even decades however sometimes they don't have all of the tools to equip you with the best long-term car ownership plan for you.

We invite you to do all of your homework and find out all there is to know about car finance or loans from Downtown Toyota and how it differs to your banks. 

Our Toyota Access product for example offers you a Guaranteed Future Value or GFV which the banks simply don't. This means you will know exactly what your car is worth over what time period, meaning you can plan trade in's and your car usage around this event to ensure you get the maximum benefit for your next new car. 

This product helps keep you in new cars with ease, provides continuous upgrades back to new car warranties and also provides a fixed capped price servicing for your car - which could save you thousands over your term. The savings from your services can even offset your interest! 

Just going with a bank may mean you miss out on opportunities to be able to better plan your finance roadmap utilising the Toyota Access guaranteed future value. 

The bottom line is a little bit of prep work could say you a lot of headaches and financial pitfalls. 

Ensure you are taking these steps to avoid the 5 mistakes above when it comes to car finance;

1. Check your credit score
2. Complete budget planning
3. Calculate your personalised car finance rates
4. Seek pre-approval from your top lenders
5. Compare loans with the long term in mind

Downtown Toyota connects customers with Toyota Access car loans that offer fixed interest rates and locked repayments to help you stay on top of your budget. To find out more about Toyota Access please get in touch with our friendly team and we’ll be happy to discuss your options with you!