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At A Glance
- A car loan can work well today and still become difficult to change later.
- How long you plan to keep the car can influence the loan setup.
- If the loan balance is higher than the car’s value, selling or trading can require you to cover the difference.
- Longer terms and balloon payments can leave more debt outstanding.
- Financing extras can increase what you owe.
- Thinking about how you may eventually exit the loan can preserve flexibility later.
Getting the Keys Isn’t the End of the Decision
When you’re buying a car, most of the attention naturally goes towards getting approved, keeping the repayment manageable and getting the keys in your hand.
That makes sense. You’re trying to solve the problem in front of you.
From my side, though, I’m also thinking a little further ahead.
I don’t expect anyone to predict exactly what life will look like in three or five years, but I do want to avoid setting up finance that only works if absolutely nothing changes.
What happens if you want to trade the car in after a few years? What if your circumstances change and you need to sell it, refinance the loan or move into something different?
Those possibilities influence how I think about the loan from the beginning and the direction we eventually take. And before we even get to that point, the car and the purchase itself can affect whether the finance goes ahead.
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Negative Equity Can Become a Problem
One of the things I’m watching is the relationship between what you’ll still owe and what the car will actually be worth.
The car you choose can also affect the finance, because cars naturally lose value as they age. Things like damage, condition or market demand can push that value down even faster. That means those two numbers don’t always move at the same pace.
Say the loan payout is $25,000, but the car would realistically sell for $20,000. You’ve got a $5,000 gap to deal with before the loan can be cleared.
That situation is commonly called negative equity, and it’s something we ideally want to avoid because it can limit your flexibility and create extra costs if you need to get out of the loan.
Negative equity isn’t necessarily a problem if you’re happy with the car and comfortably making the repayments. If you’re keeping the car long-term and don’t need to sell it, it may not be a huge concern.
The trouble usually starts when something changes and you want or have to sell, trade or refinance. Suddenly, that gap becomes something we need to manage.
That’s why I don’t just look at whether the repayment works today. I’m also thinking about how quickly the loan balance is likely to come down compared with the car’s value.
Lower Repayments Can Reduce Your Flexibility
A lower repayment can make a loan easier to live with today, but I also want to know what that choice does to the balance further down the track.
So when we’re weighing up the repayment size, I’m also looking at the flexibility you may be giving up to get it.
Stretching the loan over a longer term can keep repayments down, but it may also mean you still owe a relatively large amount when you’re ready to sell or trade the car.
The same goes for balloon payments. They can reduce the regular repayment by leaving a larger amount owing at the end, which can be useful in the right situation. But that remaining balance still has to be dealt with later.
If you’re likely to change cars before the loan is finished, those choices can make a big difference to how easy it is to get out later.
Add-Ons Can Increase The Gap
It’s easy to add on a few extras when you’re financing a car.
Accessories, extended warranties, fees and other related expenses can sometimes be rolled into the amount borrowed. That may be convenient upfront, but every extra dollar we finance increases the amount you’ll eventually need to repay.
The important thing is that those extras may not add the same amount to the car’s resale value.
If you finance a $25,000 car but end up with a $30,000 loan after adding other costs, you’ve started with debt that’s already higher than the price of the vehicle itself.
Those extras can still make sense, but I want them to be there for a reason. Every dollar we add to the loan should earn its place. After all, the more you borrow, the more it costs you.
What Happens If You Want to Sell or Trade Early?
This is where the numbers we’ve been talking about can get very real.
You can usually sell or trade a financed car, but the loan still needs to be dealt with as part of the transaction.
If the car is worth more than the payout figure, things are relatively straightforward. The finance can be cleared and any remaining value can potentially go towards the next car.
If the car is worth less than what you still owe, you’ve got a gap to deal with.
That might mean contributing cash or looking at whether the remaining amount can sensibly be dealt with another way. Either way, the negative equity doesn’t disappear just because you’ve decided to change cars.
This is why I like thinking about the exit before we ever set up the loan. The easier it is to clear the debt later, the more flexibility you keep if your plans change.
What To Take Away
With a bit of careful thought and planning, we can preserve flexibility and do our best to minimise some of the risks that come with borrowing for a car.
It’s worth remembering that while a car loan can work perfectly well today, it can become much harder to change later. That’s a good reason to think proactively from the start.
That’s why I like to look beyond approval and the monthly repayment. If there’s a reasonable chance you’ll want to sell, trade or refinance before the loan is finished, it’s worth considering how much you may still owe when that time comes.
If you’re looking at car finance and want to make sure the loan gives you enough flexibility later, get in touch and we can work through the options with you.
Tom is the founder of BrightCredit and a finance broker focused on borrowing situations that are not straightforward. His writing helps Australians understand credit, loans, and the details that can affect their borrowing options in a clearer, more practical way.