Car Loan Repayment Terms Explained

Discover key insights into car loan repayment terms and learn about payment frequencies, impacts on cost, and essential tips to manage your loan effectively.

Updated 16 February 2024

Summary:

Repayment terms in a car loan contract specify how and when you must repay the borrowed amount. This includes the frequency of payments (e.g., weekly, monthly, etc.), each payment amount, and the loan duration (stated in months or years).
Thousands of New Zealanders stress about making their car loan repayment every week, and some of them get stung with late fees when they miss the payment.
Understanding repayments is essential to ensure your financial stability and avoid potential pitfalls, which usually cost more than what's fair when late fees are added to your car loan balance.
This guide explains the intricacies of repayment terms, breaking down everything from payment frequency to loan duration.
Whether you're a first-time borrower or looking to refinance, our expert insights, real-life examples, and detailed explanations will empower you to navigate the often complex world of car finance confidently.

Know This First: Our examples explain the differences between car loan contracts:

Reasonable Terms:

A car loan contract might stipulate monthly repayments of $300 for five years.
A good contract will also offer the flexibility to make additional payments without incurring penalties, allowing the borrower to pay off the loan faster and potentially save on interest costs.

Excessive Terms:

On the other hand, a contract could demand weekly payments with strict due dates and impose harsh penalties for even a slight delay in payment.
Such terms can be challenging to manage and may lead to financial strain.
This is one reason why fortnightly or monthly repayment terms are preferred by borrowers, as fewer payments are easier to manage and less financially stressful.

Important - Our Glossary of Key Terms in Car Loan Repayments

Repayment terms in car loan contracts use specific words which we explain below:

Amortisation: The process of spreading out a loan into a series of fixed payments over time, covering both principal and interest.
Principal: The original sum of money borrowed, excluding interest.
Interest Rate: The percentage charged on the principal by the lender.
Late Payment Fee: A charge incurred when a loan payment is not made by the due date.
Early Repayment Penalty: A fee that may be charged if a loan is paid off before the agreed-upon term ends.
Refinancing: The process of replacing an existing loan with a new loan, typically to achieve a lower interest rate or different repayment terms.

How Repayment Terms Affect the Overall Cost of a Car Loan

How much your pay in total for your car loan is driven by the interest rate, how much you borrow and the repayment terms you agree to.

To make an informed decision about what loan to take out, it's important to understand some key facts:

1. Interest Accumulation Costs Vary:

The frequency of payments influences total interest. Frequent payments can lead to lower interest accumulation, whereas longer intervals between payments usually increase the total interest paid because the interest has more time to accumulate between payments.

2. Budgeting for Payment Dates is Essential:

Having enough money to make every car payment is crucial; if you miss one, the late payment fees start to rack up.
Fortnightly payments might suit those paid similarly, while monthly payments could be easier for those on a monthly salary.
Whatever you do, make sure your car loan repayment is prioritised to leave your bank account and has no chance of bouncing.
We suggest downloading a budgeting app to help you keep on track, as timely repayments minimise the risks and associated late repayment fees.

Our View:

The stress of managing stringent payment schedules can be significant as you manage dozens of other expenses such as rent or mortgage repayments, power, other car costs, and other household essentials.
Choosing a repayment schedule that aligns with your payday, so the money leaves your account as quickly as it comes in, can reduce debt stress and make repayments much easier to manage.
Always read the fine print, and don't hesitate to ask questions or seek clarification from the lender to ensure your repayment terms are appropriate for your financial situation.

Understanding the Costs of Different Repayment Terms and Frequency:

The costs and risks outlined above are best explained with two examples:

Example 1 - John's Car Loan Scenario:

Loan Amount: $20,000
Interest Rate: 15% p.a.
Scenario Comparison: 5 years versus 7 years

John is considering two loan terms for his $20,000 car loan at a 15% p.a. interest rate. The first option is a 5-year term, and the second is a 7-year term.

5-Year Term: The total repayment amount over 5 years is approximately $28,548. This option offers higher monthly payments but a lower total interest cost.
7-Year Term: Extending the loan to 7 years, the total repayment amount increases to approximately $32,419 This results in lower monthly payments but significantly more interest paid over the life of the loan.

By choosing the 5-year term, John would pay less in total interest, saving money in the long run. The 7-year term, while easier on his monthly budget, would cost him more.

Example 2 -Sarah's Car Loan Scenario:

Loan Amount: $15,000
Interest Rate: 20% p.a.
Scenario Comparison: Weekly versus Monthly Payments over 5 Years

Sarah is evaluating her $15,000 car loan at a 20% interest rate with weekly and monthly repayment options over 5 years.

Monthly Payments: The total repayment amount with monthly repayments is approximately $23,845. This plan is simpler for those who budget on a monthly basis.
Weekly Payments: When choosing weekly repayments, the total repayment amount is approximately $23,756. This slightly lowers the total amount repaid due to more frequent principal reductions, but it's around $110 in total over five years, which can be worth the cost for the financial freedom and flexibility.

Sarah's choice depends on her cash flow and budgeting style. Weekly payments marginally reduce the total cost but require more frequent budgeting. While slightly more expensive overall, monthly payments usually align better with a monthly payday cycle.

Questions to Ask Your Lender to Understand the Risks, Costs and Financial Implications of Your Car Loan Repayments:

1. What is the total interest cost for different repayment schedules?

Understanding this helps you see how the length of your loan and frequency of payments affect the total amount you'll pay over its life.
Longer terms might mean lower monthly payments but higher overall interest and our video below explains this with relevant examples.

2. What are the penalties for early repayment or extra payments?

Knowing this is crucial, as some loans charge fees for making extra payments and/or paying off all of your loan balance early, which we see as unfair unless they're reasonable.

3. How do I renegotiate repayments if I experience financial hardship?

If your financial situation worsens, you can apply to have your repayments adjusted to avoid default. This option is required under New Zealand law.
Our car loan and hardship application guide has more details about each lender's process.

4. What is the impact of late payments on my credit history and loan cost?

Late payments will almost always incur additional fees and negatively affect your credit history.
What you'll pay varies by lender; our guide to car loan fees has more details.

Finally, Car Loan Expert Founder Christopher Walsh offers must-know tips for understanding and navigating repayment terms in car loan contracts:

"Opting for lower monthly payments over a longer period can seem appealing, but this often means paying more in total interest. And when interest rates can be as high as 15% or 20% p.a., these costs are significant.

Conversely, higher payments over a shorter term can strain your monthly budget but save you money in the long run. It's about finding a balance - a term that won't overburden your monthly expenses but won't unnecessarily extend the debt.

If you've missed payments on credit cards or loans before, car finance repayments are usually penalty-heavy, meaning it costs a lot to make that mistake. For this reason, budgeting and planning (and prioritising car loan repayments) are all essential.

I suggest approaching your lender with a clear understanding of what you can realistically afford - don't be ambitious with what you can afford because cars are always expensive to run, and surprise costs come up and need to be paid.

Be prepared to discuss your income, expenses, and financial stability when you apply for a loan. It's essential to align payments with your payday so you can avoid the common stress of car loan repayments that plague thousands of New Zealanders every week".

Remember, being informed and prepared gives you the power to make better financial decisions. By understanding and managing your repayments, you can save money and avoid burdensome debt. Too many New Zealanders take on car loans and struggle with fees and penalties they don't understand, as this Stuff.co.nz article from November 2020 explains.

Empowering yourself with knowledge is key to navigating car finance successfully and avoiding what can, for some, become 'poverty loans.'

Frequently Asked Questions

What does 'amortisation' mean in the context of car loans?

Amortisation spreads your loan payments over the loan term. Each payment includes a portion that goes towards paying off the principal (the amount you borrowed) and a portion that covers the interest. Early in the loan term, a larger portion of each payment goes toward interest; later, more goes towards reducing the principal.

How does a higher interest rate affect my car loan repayments?

A higher interest rate increases the cost of borrowing. This means that for the same loan amount and term, you will have higher monthly payments compared to a loan with a lower interest rate. Additionally, over the life of the loan, you will end up paying more in total interest, making the loan more expensive overall.

What impact do extra payments have on my loan?

Making extra payments on your car loan can significantly reduce the remaining principal, which in turn reduces the total amount of interest you'll pay over the life of the loan. Additionally, it can shorten the loan term, meaning you'll be debt-free sooner. However, check if your loan has any prepayment penalties.

How does the length of my car loan affect my monthly payments and total interest paid?

Extending the length of your car loan will typically reduce your monthly payments but increase the total interest paid over the life of the loan. Conversely, a shorter loan term will increase your monthly payments but decrease the total interest paid. It's essential to balance affordable monthly payments with the overall cost of the loan.

What happens if I make a late payment on my car loan?

Making a late payment can lead to immediate consequences, such as late fees. Additionally, if the late payment is reported to credit agencies, it can negatively impact your credit history. This could affect your ability to obtain credit in the future or mean you pay higher interest rates. Frequent late payments may also lead the lender to take more severe actions like repossession and reject hardship applications.