We explain the pros and cons of financing directly through a specialized car finance company vs adding your car payments to your home mortgage.
It’s easy to think that paying for your new car with a mortgage top up is cheaper than other car finance options. Especially now, with home loan interest rates the lowest we’ve seen in years, but there are a few things to consider before you make that phone call, or visit to your bank manager.
Repayments made over a mortgage term for the extra amount you borrow to pay for your car add up to a higher cost of borrowing overall, and you may even find yourself paying for your car long after it’s sold, too.
Let’s get back to those home loan interest rates though. In NZ they are lower than car loan rates, but the amount borrowed to buy a house is usually much more than the amount borrowed to buy a typical car, and the term is longer; a maximum of 30 years on houses versus 5 years on cars. When consider the effect of compound interest over the term of the home loan (up to 30 years) as opposed to the longest car loan term of 5 years, this increases the amount of interest payable on your home loan even though the interest rate may be lower.
Home loan vs car loan, the difference explained
The mortgage calculator on Interest.co.nz's website is a great comparison tool. A $500,000 mortgage paid over a 30-year term at 3.99% per annum, if making the minimum repayments over the next 30 years, will cost a total of $358,240 in interest and fees.
If your new car costs $25,000 and this is added to the mortgage above, the total amount of interest over the 30-year term now totals $376,080. The extra interest is $17,840 – almost another new car! This doesn’t even include the actual repayment of $25,000 for the car itself.
Now let’s look at a car loan that is taken out independently of the mortgage and how much interest would be repaid on the same car. As a homeowner with clean credit, you could qualify for an interest rate as low as 7.90% (T.A.P.) through NZVF for your personal secured car loan. Making the minimum repayments over 5 years, you will pay a total of $5,360 in interest. You will have saved about $12,480 interest on your new car, half of your new purchase.
How to save money when taking out your new car loan
Choose a secured loan - Choosing a secured car loan rather than a personal unsecured loan will ensure you get the lowest possible interest rate for your vehicle.
Make additional repayments - Making additional repayments when you’re able will pay the loan off sooner and reduce the total amount of interest payable over the term of the loan. This makes much more of a difference in the amount of interest you pay than a difference in the actual interest rate of your loan.
Choose the right lender - There are many lenders in the market catering to new and used car buyers all with different circumstances. While choosing the right lender is important, you need to be very careful making multiple applications for finance because each lender may carry out a credit check, leaving a traceable enquiry on your credit file and thus affecting your overall credit score. This will affect your efforts to secure a good interest rate. How can you avoid this? When applying with NZVF you know that you are always going to get the very best interest rate we can offer you. Since being established over 12 years ago, NZ Vehicle Finance has constantly offered some of the lowest available vehicle interest rates in NZ. Backed up by our great team, and personalised service.
No matter where you are in NZ, car loan financing with NZ Vehicle Finance is fast and easy, just apply online and we'll let you know if your car loan is approved... It's that simple.