Lessons in loans — especially car loans

Every Mickle

BY RANDY ROWE

Sunday, August 25, 2019

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Editor's note — the following is part one of a two-part series on wha t to look for and ask when taking out a loan.

Based on a discussion I saw recently on Twitter about purchasing a car, I was made to realise how little many people actually know about taking out a loan.

What's more, I realised that many institutions were taking advantage of people's lack of financial knowledge. I try to have you keep as much of your money as you can in your pocket by sharing whatever knowledge I can. Let me assist by highlighting what things you need to consider when taking a car loan (or any loan for that matter).

When you have decided to buy a car via loan, you'll have many options. Nearly every financial institution offers car loans. They're extremely popular and relatively easy to get because the banks are very comfortable lending since the vehicle serves as its own collateral (a fancy term that means something that serves as security in case the loan isn't repaid) and often times no deposit is needed (based on certain criteria, usually vehicle age).

I'll be speaking generally here, so don't take my pronouncements as law. The two most popular institutions to offer car loans are credit unions and banks. People go to banks or credit unions based on their own situation. Some people say that loans at credit unions tend to be easier to qualify for, others prefer banks because of the sometimes, better terms. That is usually the trade-off; cheaper terms at a bank, but harder to qualify vs easier qualification and greater loan flexibility at a credit union, with more expensive loan terms.

Regardless of where you get your loan from, however, these are the things that you should enquire about and include in the things base your decision on.

WHAT IS THE ANNUAL INTEREST RATE?

Knowing the annual interest rate is key. This is what will determine exactly how much money you will be paying over the life of the loan. I made sure to say “annual interest rate”? It's commonly referred to simply as “the interest rate” but some institutions have quoted customers an interest rate on loans that is monthly when asked “what's the interest rate?”. I have had this done to me, and when I asked why, I was told something to the effect of it being a sales tactic. Customers might not be comfortable with the number they would hear if the annual interest rate was told when asked, but they are required to tell you the rate when asked. So they tell a nice low sounding rate (For example, “3 per cent ”) which is a way to hide a much higher annual interest rate (in the given example, “36 per cent annual interest”).

Bottom line, your annual interest rate determines exactly how much money you'll be paying back for the life of the loan, lower is better!

CAN THE ANNUAL INTEREST RATE CHANGE?

If the answer to this is yes, leave immediately. Don't take car loans (or any consumer loan for that matter) with variable interest rates. You want to know what your rate is and it should remain there. Anything else is inviting the possibilities of future headaches.

HOW LONG IS THE LOAN FOR?

The length of the loan, sometimes referred to as the “life of the loan” is how long the loan will last. You should get this number in two formats, years or payments, for example, a car loan might be for seven years or 84 monthly payments. This makes it easier to plan ahead.

CAN I SEE AN AMORTISATION SCHEDULE PLEASE?

Do not sign any loan agreement until seeing and being given a copy of the amortisation schedule. A loan amortisation schedule is a simple list of the dates when you are expected to make each payment, exactly how much money is to be made per payment, what portion of each payment is going to interest vs going to the principal, how much of the overall loan is left to be repaid aka the balance.

By the way, the “principal” is the money that you were actually lent, the “interest” is the money that goes on top of aka “accrued on”, your principal each pay period.

One bonus of the amortization schedule is that it also shows exactly how much money you'll pay back in total. That figure often shocks people (a 1.5m car loan taken at 9 per cent for 7 years works out to you paying back $2.06m in total). If you're taking an optional loan, and the final payback total shocks you into not taking the loan, count it as a plus.

An example of an amortisation schedule is provided.


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