Car loan finance terms
How long you can finance a car for depends primarily on two factors:
- the age of the vehicle
- the kilometers on the vehicle
For new cars the shorter the term you choose the better interest rate you will get.
For used cars there’s a little more to it.
Used Car Loans
Banks will only lend so much money for any given car. They will also only finance the car for a certain number of years depending on how old it is.
Another rule of thumb: the older the car and the higher the kilometers the shorter the finance term the banks will offer. Usually, if the current age of the car plus the finance term is greater than 10, the banks will not approve the application.
For example, let’s say you’re looking at a 2014 Toyota Corolla. Using the above formula, we can assume the banks will finance that car for a maximum of 5 years. Here’s how we got that answer:
2019 (current year) – 2014 (the year of the car) = 5 years. The difference between 5 and 10 is 5.
Here’s a quick reference to further demonstrate the formula:
Year of Vehicle | Maximum Finance Term in Years
2018 | 7
2017 | 7
2016 | 7
2015 | 6
2014 | 5
2013 | 4
2012 | 3
Loan to Value
In addition to age and number of kilometers on the car the bank will also consider the total amount we are asking to borrow. They use a ratio called Loan to Value (LTV).
This is the ratio of how much they will lend you for a car vs. what the car is worth. It usually only becomes an issue if you are refinancing debt from your trade-in vehicle.
Let’s say that you have a trade-in that’s worth $10,000 but you still owe $15,000 against it. In order to trade that car you either have to refinance the $5,000 in the difference, or pay it off out of your pocket.
Because vehicles depreciate as they age banks will lend less money for older cars than newer ones. This makes sense – a bank isn’t going to lend you $30,000 for a 2014 Toyota Corolla because if something happens to the car, or to you, they would never be able to recover anything near that amount. They would, however, lend $30,000 for a brand new Corolla (because it is currently worth more and this is less risky in their eyes).
This is why sometimes the bank will grant an approval, but not for the car you want. It’s like purchasing a house. The bank will not lend you the money to buy a house if the house you’re looking at is appraised much lower than the amount you’re asking for.
This concludes our first series on auto financing. In future posts we will cover more topics surrounding the purchase and financing or leasing of new cars.
Here’s the Coles Notes version of everything we’ve covered in this series:
Affordability – Debt Servicing Ratio
To calculate your own debt service ratio use the following procedure:
Annual Gross Income / 12 = Monthly gross Income.
Monthly Gross income x 40% = Maximum debt servicing
Installment payments (including rent) + revolving credit payments (3% of limit) + New Loan Payment = Obligations
Total Debt Servicing Ratio = Obligations / Monthly Gross Income.
If your Total Debt Servicing Ratio is less than your Maximum Debt Servicing, then the new payment should be affordable to you in the bank’s eyes.
Remember: This is not an exact calculation and each bank has a few other variables they will factor into an application, but this should give you a good idea of where you stand.
How Cosigners Work
If you cosign a loan for someone you are equally liable for making the payments on that loan. Likewise, if someone cosigns for you, they are liable for how well you make your payments.
Parental / Relative cosigners can help with blemished credit.
Spousal cosigners can help with affordability.
Auto Finance Rates and Loan Terms
Interest rates are always changing. The rate you got on your last car loan will most likely differ from the rate you’ll get on your next. It all depends on the current economic climate.
Current rates for used cars are between 5.75-7%.
In branch bank rates are between 8-10%.
Subprime bank rates can range from 8-30%.
The older a vehicle is, the shorter the finance term you can get for it.
Banks will only lend so much money against any given vehicle. They will not lend large amounts against cheap cars.