How to choose the right loan when you buy a car, and your consumer rights and ways to protect yourself from common problems when you get vehicle financing.
When you get a loan for a vehicle:
- Consider your options first
- Check your loan contract carefully. Understand your cancellation rights
- Protect yourself from common problems
- Know what your options are if you can’t make payments. Know what to do if you buy a faulty car on finance.
Consider your options before you buy
Borrowing money is a long-term commitment. It leaves you at risk if your financial situation changes, and you can no longer make payments.
It’s best to avoid loans if you can. You may consider buying an older car or saving up enough cash to buy outright instead.
If you do finance your car, make sure you know what you are agreeing to before you sign up. This means knowing you can make payments on time. It also means adding up the total cost of the loan given your particular payment terms. For example, if you pay back a $20,000 car loan at an interest rate of 15% over three years, you will end up paying over $24,000, or 1.25 times the amount you borrowed. Use Sorted’s debt calculator to add up a loan’s lifetime cost.
When you consider whether you can afford the car, remember the other costs you’ll be paying as well, eg petrol, insurance and licensing fees.
Budgeting tool(external link) — Sorted
Choosing the best loan for you
Most dealers will offer to arrange finance, but you can usually get a cheaper interest rate from a bank or by extending your mortgage. Shop around for the best finance deal and lowest interest rates. If possible, get pre-approval for the best deal you can find before you buy a car.
If you do get financing from a dealer, you may be able to negotiate rates on the lot. Most car dealers arrange your financing with a third-party lender. By taking out a loan at a dealership, you are entering into a finance contract with both the dealer and the lender. Make sure you understand each of their particular terms and conditions.
One advantage of getting a loan through a dealer vs arranging a loan yourself is the lender will be bound by the Consumer Guarantees Act. This means if the dealer goes bankrupt or refuses to provide you with a remedy for a problem, you can insist that the lender sort the problem out.
Compare different lending options and find what’s right for you:
Test your knowledge!
If you buy a car on credit from a dealer, how long do they have to tell you about the contract terms?
The dealer must tell you everything you need to know about the agreement before you sign.
What to check before signing a loan contract
You have rights under Credit Contracts and Consumer Finance Act (CCCFA) whenever you enter into any consumer credit contract.
Before you sign, the lender must:
- explain the contract to you so you understand what you are getting into
- check whether the loan is suitable and you can afford the loan without putting you in a financial situation that is too difficult to manage
- check whether any insurance sold with the loan is affordable and suitable for your situation.
They must give you:
- a disclosure statement with the total cost of the loan, repayments, how much interest is charged and any other fees
- an accurate written copy of your loan contract
- a copy of the terms of any credit insurance, extended warranties or repayment waivers.
All of these documents must be clear, concise and written in plain language. They cannot be misleading or confusing.
Before signing up for any finance, take a copy of the contract home. If you have any questions or doubts, get advice.
Under the Credit Contract and Consumer Finance Act a lender must comply with disclosure obligations and determine affordability and suitability of the loan. Failure to do so can result in a refund of interest and fees and or damages to the borrower.
Disclosure statements
A lender must give you detailed information about the loan’s cost. This is often called a disclosure statement.
A disclosure statement must clearly list:
- amount owing
- payment terms
- payment details
- interest rates and how the interest is calculated
- any fees or charges
- any security interests
- any penalties charged for late or missed payments
- what happens if you can’t make repayments, eg repossession of the vehicle or any other items you’ve listed as security
- statements on your right to change the terms or cancel the loan contract.
Look out for:
- whether the cash price on the vehicle’s Consumer Information Notice (CIN) matches the price on the loan contract
- details of any fees charged, eg loan establishment fees, insurance charges, early repayment charges and the cost of any credit checks
- whether any free extras are really free — if there are special offers on the vehicle finance like cash backs or gifts, make sure you’re not actually paying for them somewhere in your loan
- what insurance is required — you may have to pay extra for insurance on your loan in the event you can’t afford repayments.
You may cancel your credit contract at any time if you didn’t get a copy of the disclosure statement or it is incorrect, incomplete or illegible.
If full disclosure is not made, a lender:
- can’t recover any interest and fees for the period of non-compliance
- can’t enforce the contract
- may be liable for penalties.
Credit contracts: Plain English definitions
Your cancellation rights
You can cancel the credit contract by notifying the lender if you change your mind within five working days of disclosure. If you cancel the credit contract, and you still want to buy the car, you have 15 working days to come up with the cash price. You can cancel the sale as well if you haven’t taken the vehicle yet. This means you can cancel the sale and the credit contract.
If you’ve taken the vehicle home, you can cancel the credit contract within five working days, but you still have to buy the vehicle. You will have 15 working days to come up with the balance of the cash price for the car.
Read more about Cancelling your credit contract
If in doubt, leave the car at the lot and seek independent advice.
Protect yourself from common problems
Here are some commons risks to be aware of when you take out a credit contract — and some tips to avoid them.
All fees must be reasonable and related to actual costs. Reasonable fees include:
- loan set-up fees
- insurance charges
- early repayment charges
- cost of any credit checks.
Fees have nothing to do with the interest rate you are charged.
If the finance company is charging for fees you believe may not be reasonable, ask the dealer to explain what the fees cover.
You can get advice from a community law centre on whether the fees are reasonable. If they aren’t, you can report the finance company to the Commerce Commission.
Our law centres(external link) — Community Law
Make a complaint(external link) — Commerce Commission
To protect themselves, the lender will usually register a security interest in the vehicle until you finish paying the loan. This means you can't sell the vehicle or give it away.
They may also attach a disabling device called an immobiliser, which can be activated to disable the vehicle. This can only be done under strict conditions, and if you have been given reasonable notice in advance. Also under strict conditions, lenders can repossess the vehicle if you don’t make payments.
Sometimes, a lender may take a security interest in other belongings. But they cannot do so with your:
- beds and bedding
- cooking equipment, eg stoves
- medical equipment
- portable heaters
- washing machines
- refrigerators.
If they try to take a security interest in any of these belongings, report the lender to Commerce Commission.
Make a complaint(external link) — Commerce Commission
It’s important to know if a finance company will take a security interest on any of your belongings. To protect your assets, you may want to find a lender who doesn’t.
Sometimes a lender will require someone else, called a ‘guarantor’, to promise they will pay back the loan for you if you cannot. This may be your partner, parent or someone else who has agreed to cover your payments.
If possible, try to avoid a loan that requires you to list a guarantor. This way you won’t put someone you care about in a difficult financial situation.
If you do have a guarantor, the lender must:
- explain the contract to the guarantor so they understand what they are getting into
- check whether the guarantor can afford the loan without it putting them in a situation that is too difficult to manage
- give them a copy of all loan documents you receive
- give them a copy of the guarantee they signed.
If your concern or difficulty is not resolved to your satisfaction, you can then contact the Financial Dispute Resolution Service.
Financial Dispute Resolution Service(external link)
If you are unable to make repayments
If you can't keep up your repayments because something unexpected happened such as illness, injury, or losing your job, contact the finance company as soon as possible to see if you can fill out a hardship application. You can ask your finance company to:
- reduce the amount you pay by spreading payments over a longer period
- take a payment holiday until a future date when you can start paying again
- make interest-only payments for a period of time.
Even if you don’t qualify for a hardship application, you can still:
- approach the finance company to see if they can help
- get advice from a free financial mentor
- return the vehicle to the finance company, if possible – you will still owe them money but your debt will not include penalty interest and repossession costs
- contact the Insolvency and Trustee Service to discuss your options.
Personal debt(external link) — Insolvency and Trustee Service
Read more on Loan repayment issues and hardship applications
Repossession and your rights
If you can't make your vehicle loan repayments, the finance company may be able to take your vehicle away from you and sell it to repay your loan. This is called repossession.
A lender can only repossess your vehicle if:
- this right is specified in your credit contract,
- you have missed payments or broken another term in the contract, and
- they sent you a warning notice at least 15 days beforehand.
After they take your car, the finance company must send you a post-repossession notice outlining your options. These include:
- paying back your overdue payments to get the car back
- paying back the whole amount still owing to get the car back
- letting the finance company sell the car.
The notice must also include an estimate of the car’s value. Often, this amount is much less than the money you still owe. If the lender sells the car for this price, you will still owe them the remaining balance.
If you decide to let the lender sell the car, you do have a right to get an independent valuation of the car yourself. You also have a right to find and introduce a buyer to the lender. If you find a buyer, your lender must sell the car to them for at least the estimated value listed in the post-repossession notice.
The finance company cannot sell the car for an unreasonably cheap price. They must take reasonable steps to get the best market price for the car.
Within seven days of the sale, the lender must send you:
- how much the car sold for
- any costs related to the sale of the car
- the original balance of your loan before the car was sold
- the amount you still need to pay back if there is shortfall between the sale price and what you owe — or if the car sold for more money than you owed, the amount the lender will pay back to you.
After the car is sold and if you still owe money, the finance company cannot add any other fees to your debt, eg interest, penalties, collection costs. If they do, you can report them to Commerce Commission.
Make a complaint(external link) — Commerce Commission
Debt collection and repossession
What to do if you buy a faulty car on finance
If you find a minor fault with the vehicle, you will need to seek a remedy from the seller. Continue to make your loan repayments in the meantime.
If you bought a vehicle from a car dealer, you may be able to get a remedy —a repair, replacement or refund — under the Consumer Guarantees Act.
Read more on Consumer guarantees for products
If the dealer will not resolve the problem, get an independent report from a mechanic.
If you get a refund for the car from the dealer, you will have to repay the finance company with the money you get back. If you got the loan from your bank or any lending institution apart from the dealer, you will have to arrange repayment yourself.
If you bought a faulty car from a private seller using a personal loan, you may not get a remedy from the seller — but you will still have to repay the finance company.
Read more on Solving issues with your car dealer
Read more on Solving issues with your private vehicle seller
Example of non-disclosure on a loan
Finn buys a car on finance from his local car dealer and does not receive a copy of the disclosure statement. Finn may cancel the loan contract at any time afterwards and get finance elsewhere if he is not happy with the terms, since he did not get full disclosure as required. He can also give the car back.
Example of faulty car bought on finance
William buys a used car from a car dealer for $15,000 on finance from a finance company. The car develops mechanical problems with the transmission and engine after three months. William finds out the cost to repair will be $8,000. The car dealer refuses to do anything for William who decides to reject the car under the CGA. When the car dealer refuses to refund his money, William takes the car to the Motor Vehicle Disputes Tribunal (MVDT). The MVDT finds in William’s favour and orders that the car dealer take over responsibility for the finance.