Car finance with low repayments

A low repayment is not the same as a cheap loan. Lenders and dealers often advertise the weekly figure because it is the smallest number. What matters more is what you pay in total and what happens at the end. These examples use a $30,000 loan at an example rate of 11.95%. The rate is an illustration, not an offer, and your own will depend on your situation.

Way 1: Stretch the term

Stretching the term is the most common way to get a smaller payment. Here is the same $30,000 loan, paid weekly.

Going from four years to seven drops the payment by $59.87 a week. That is a real relief on a tight budget. It also adds $6,536.42 in interest.

There is a second cost. A car loses value as it ages, and a long loan can leave you owing more than the car is worth for longer. That matters if the car is written off, stolen or you want to sell.

Way 2: A balloon payment

A balloon is a lump sum owed on the last day, so the regular payments only pay part of the loan. On the $30,000 loan, paid monthly over five years:

• No balloon: $666.58 a month, interest $9,994.54.
• $8,000 balloon: $568.49 a month, interest $12,109.33.

That is $98.09 a month less, but $2,114.79 more interest, and you still owe $8,000 on day one of month 61. Interest is charged on the balloon the whole time.

Combine the two and the effect compounds. Over seven years with an $8,000 balloon the payment is $467.44 a month, which is $199.14 below the plain five-year loan. The interest is $17,264.86, which is $7,270.32 above it.

A balloon can suit someone who expects a lump sum or plans to sell or trade the car at the end. The risk is that the car is worth less than the balloon, or that you cannot find the money. Then you may have to refinance the balloon, which has its own costs. See refinancing a car loan.

Way 3: Borrow less

This is the lever that lowers the payment and the total together. Every dollar you do not borrow does not earn interest. On the same 11.95% weekly five-year terms, the weekly payment per $1,000 borrowed is about $5.11. So:

• A $25,000 car instead of $30,000 saves about $25.57 a week and $1,647.20 in interest.
• A $5,000 deposit on a $30,000 car does the same.

If you are choosing between a dearer car on a long term and a cheaper car on a shorter term, the cheaper car usually costs less in total and leaves you in a better position at the end.

Way 4: A lower rate

The rate does not change the payment as much as the amount does, but it still adds up. Example rates on a $20,000, five-year loan paid weekly: 9.95% is $97.71 a week and 13.95% is $106.94. The gap of $9.23 a week is about $480 a year. Over five years it comes to $2,400 in interest.

You cannot dictate your rate, since lenders set it after looking at your situation. You can compare quotes, though. The same borrower can get different offers from different lenders. Ask for the total cost and fees in writing so you compare like with like.

Way 5: A cheaper car, or an older one

An older car is cheaper to buy but may cost more to run, and may be harder to finance on a long term. Check the running costs and the warrant of fitness history. A lower repayment is no use if repairs eat the saving.

How the options stack up

On the $30,000 loan:

The last row shows what happens when you borrow less: a lower repayment than the 7-year option at a lower cost. That is the point. Lowering the amount borrowed beats stretching the time. You can test your own combination in the calculator by changing the price, term and balloon, and the weekly calculator shows each weekly figure.

Checking a low-repayment offer

When an advert or a salesperson stresses a low weekly figure, ask:

1. What is the term, and is there a balloon? What is the amount and the date?
2. What is the interest rate and what are all the fees?
3. What is the total I will repay?
4. What happens if I want to pay it off early? See early repayment fees.
5. Does the loan include insurance or an extended warranty? What do they cost?

Lenders must explain the contract, check the loan is suitable and affordable for you, and give you a disclosure statement. Consumer Protection NZ explains what you should receive. If you do not understand something, ask before you sign. If you were not given a disclosure statement, or it is wrong or incomplete, you can cancel within five working days of disclosure.

Questions to ask yourself first

Before you chase a lower number, work through these.

• What can I really pay? Add up rent or mortgage, food, power, phone, insurance and other debts. What is left is the most the car can cost, including fuel and servicing, not only the repayment.
• How long will I keep the car? If you expect to sell or swap in three years, a seven-year loan means you will owe a lot at that point.
• What if my income drops? A loan sized to the very top of your budget leaves no room. If you are on irregular hours, build the payment around a low week, not a good one.
• Is a cheaper car enough? Often it is. A car that does the job for $5,000 less can lower the payment more than any term trick, with no extra interest.

If the answers show the payment is tight even with the longest term, the safer move is usually a smaller loan, not a longer one.

When the repayment is too high already

If your problem is a loan you already have, the options are different. Talk to your lender about hardship help, and see what to do when you can’t afford car repayments. Free budgeting support is available from MoneyTalks on 0800 345 123.

Getting offers to compare

To compare actual offers, our check is a referral service, not a lender or a dealer. It sends one application and one soft credit check to a panel of NZ lenders. Nobody can promise approval, and lenders decide case by case. The disclosure page explains how we are paid.

Sources

• Consumer Protection NZ: loan for your car for what lenders must provide and the cancellation rule
• Sorted for borrowing and budgeting basics
• MoneyTalks for free budgeting help