November 3, 2021
If you’re in the market to buy a car, you may wonder if it’s better to get a redraw home loan or take out a car loan. This blog post will go over both options so that you can make an informed decision.
Keep reading to learn more about which financing method is best for your needs.
You may consider using your home equity for many purposes. One seemingly good reason to use it is to purchase a car. Yet, you may not have considered whether using your home equity to purchase a car is cost-effective.
You may have been paying on your home mortgage for some time now. Some homeowners in this position get ahead on their mortgage repayments. In that case, they’ve accumulated equity that they can redraw.
A redraw loan is convenient. This is the top reason why many homeowners use their redraw facility.
When buying a car, the homeowner doesn’t need to shop around for a lender. Nor do they need to worry about a credit check. For these reasons, a redraw loan may seem like the easiest option for buying a car.
Also, with a redraw loan, the mortgage holder will only need to make one payment per month. The payment will cover both their home and vehicle.
Let’s look at an example of how redraw loans work.
Over time, you may have made extra payments on your mortgage. Alternatively, you may have made an extra lump sum payment. If so, you can borrow against those extra payments.
Imagine that your monthly mortgage payment was $600. However, you paid $700 per month and made a lump sum payment of $2,000.
In that case, you’ve made $3,200 and extra payments. You can potentially redraw those funds as needed if allowed by your bank—more on that in a moment. If you were to keep these extra payments up for five years, you’d have access to $16,000 through your redraw facility.
Every bank has different maximum and minimum redraw amounts. For example, one bank may have a minimum redraw of $2,000 and no maximum redraw limit.
Each time you use your redraw facility, you must pay a fee. For instance, the bank may charge a $50 fee every time you use this financial instrument. You must pay the fee whether you withdraw the money electronically or in person.
Once you’ve made redraw arrangements, accessing your money is relatively straightforward. You can withdraw redraw funds as you would any other money in your account.
For some homeowners, accessing their redraw facility is so easy that it seems like a no-brainer. However, there’s a catch when using redraw funds to purchase a car.
It’s true that car loans usually have a higher interest rate. However, they have much shorter repayment terms.
For instance, the repayment term for a car usually spans 5 to 6 years. However, you may have 20 years remaining on your mortgage payments.
In the long run, you’ll end up paying more in interest on the money you access by using your redraw facility to buy your car. This kind of long-term loan will cost you more.
Also, a car is a depreciating asset. Even a new car depreciates by as much as 11% as soon as it leaves the dealer’s lot.
Imagine that you’ve purchased a $32,000 car. As soon as you complete your purchase, it will immediately lose around $3,520 in value.
A car is not good debt for this reason. As a result, you should work out the most affordable buying option possible when buying a car.
You can figure out how much you can afford to borrow with a car loan calculator. It’s also helpful to look for the shortest loan repayment terms.
20,000 mortgage holders at ME Bank were surprised to learn that their lender reduced the redraw maximum. The bank slashed the redraw amount by thousands of dollars.
During the coronavirus, this decision was especially troubling. Many mortgage holders were relying on their redraw facility to weather the pandemic.
Bank representatives stated that they made the decision because the pandemic reduced the ability of mortgage holders to make payments. In turn, this circumstance made it more likely that homeowners could fall behind on their repayment schedules. As a result, the bank decided to reduce the redraw facility.
ME Bank customers were outraged. They blasted the bank on social media.
The point here, however, is that your redraw facility may not prove as available as you first believed.
It’s becoming increasingly difficult to access redraws. One ME Bank customer revealed that the bank reduced her redraw the limit by more than $16,000. Another expressed that the bank did the same to him to the tune of $20,000.
Even worse, the bank provided no notice about the action. It didn’t communicate with customers in any way, shape, or form.
The latter mortgage holder expressed that he was not relying on his redraw loan. Still, he lamented that he had been a customer for more than 20 years and was ahead of his payments. He felt as though the bank should have considered the possibility that he may have needed access to his redraw funds.
Instead of paying more in interest over time with a redraw loan, why not consider a car loan specialist? C1 Finance is Australian owned and operated. We’ve specialised in car lending in Australia for more than 15 years.
Since 2005, we’ve weathered the ups and downs of one of the fastest-growing industries in Australia. We started out by providing small cash loans to hard-working Aussies.
Eventually, however, we transitioned to financing new and used vehicle purchases. Now, car loans are our top priority. We’re passionate about helping our clients get funding when they need it the most to purchase a car.
Over the last few years, we’ve streamlined our products and services. We’ve created financial products to better suit your borrowing needs.
Many borrowers are struggling with credit issues. We now specialise in assisting borrowers with existing debt arrangements and former bankruptcies. We can help you to secure car financing.
When the pandemic struck, it affected everyone. Since then, we’ve made the borrowing process faster and more affordable to best serve the needs of our clients. Please feel free to visit our homepage and try out our auto loan calculator.
A bad credit score can affect you in many ways. Despite a low credit score, however, we have a solution that can help you to access car funding.
Sometimes, it can prove challenging to figure out why your credit score is so low. There are several factors that can affect your credit.
Fortunately, there are also ways that you can improve your score. Identifying any problems is where you’ll need to start.
Sometimes, people fall behind in their payments, especially in these trying times. Unfortunately, late payments are one of the worst things for your credit. Every late or missed payment reflects on your credit score.
Other people have defaulted on student loans, car notes, or mortgages. This kind of activity can lower your credit score significantly. Also, they’ll stay on your credit report for quite some time.
Finally, other people may carry too much debt. Your credit utilisation ratio affects your credit rating greatly. This measurement is a figure that lenders use to assess your ability to repay a loan.
Most people can’t afford to purchase a car with cash. If you’re facing any of these credit challenges, C1 Finance can help.
You can buy a car, even if you have bad credit. However, there are a few things that you need to do.
Many lenders won’t provide you with funding if you have poor credit. However, you can overcome this obstacle by finding a specialist lender who helps clients with bad credit. You can even find a lender who doesn’t look at your past credit to approve your loan, like C1 Finance.
You may worry that a loan will cost too much if you have poor credit. However, that’s not necessarily the case.
Here, it’s important to compare car loan rates. However, comparing rates can prove challenging if you don’t know how to do the research. Still, there are resources that you can use to compare various car loan rates.
Don’t settle for a high 30% interest rate. It’s too expensive.
Instead, find a lender who’s willing to work with you. At C1 financing, you can count on a regular payment that you can afford. We’ll help you get into the vehicle that you need.
Hopefully, you now see why a redraw loan isn’t your best option for buying a car. At C1 Finance, we believe that it shouldn’t be hard to get a car loan just because you have bad credit.
Start your search today. Give our loan calculator a try, then apply now and get pre-approved for your car financing loan.
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
The Australian Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.*This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.