What will a lender want to know about me?
There are a few things a lender will look at when deciding if and how much they’re willing to lend to you so you can buy your caravan
1. Collateral
This is your security. If you’re planning to take out a secured loan on your camper or caravan, they’ll assess the value and the amount you can borrow will be tied to that. Offering collateral can make a loan cheaper (because it’s less risky) but it also means you don’t own your motorhome or caravan outright and will need the lender’s sign-off if you sell it. If you’re after a personal loan then you won’t be offering any security, so you can expect to pay more in interest.
2. Credit
Your credit rating is your financial history. If you have some black marks against you (for missed payments on other loans, or defaults in the past) they might decide you are too much of a risk and refuse you a caravan loan.
Some lenders will offer loans even to people with a poor credit rating – but usually at a much higher interest rate to compensate them for the extra risk they’re taking on.
3. Capacity
This is the most important thing when it comes to getting a caravan loan. The lender will look at your income and your expenses (including any other loans you’re making payments on) to see if you have enough money left over to make regular repayments.
They’ll decide how much you can borrow based on how much they think you can reasonably repay. If you don’t have the capacity to service the loan, it doesn’t matter how much collateral you’re offering, it’s very unlikely you’ll find a lender willing to offer you a caravan loan.
Lenders like things simple, so you can expect it to be much easier to get a loan if you have a steady, permanent job that you’ve been doing for a while, and regular expenses.
It can be a lot harder to prove you have capacity if you have a casual job, have recently changed jobs, or are self-employed.
You may still be able to get a loan but may need to look around for a lender who is willing to work with you, go through a more complicated application process, or pay a higher interest rate to compensate for the extra risk.
How much will a caravan loan cost me?
The most obvious cost of your loan is the interest rate. This is the percentage of the loan you’ll have to pay back on top of the amount you borrow in the first place. The higher the rate, the more money you’ll have to pay back in total – but it’s not just calculated once. The lender will calculate it regularly (monthly, weekly, or even daily) on the remaining balance.
That’s why a lower interest rate doesn’t always mean your loan will be cheaper – if you’re adding the cost of your new RV to your mortgage, you’ll be paying back that loan over decades, and paying interest on it (and interest on the interest) for all that time. Which can cost you much more in total, even though your monthly payments and interest rate may both look nice and low.
The general rule of thumb is that you’ll pay the least amount of interest if you go for the shortest possible repayment period – and if the loan terms and your circumstances allow, making more frequent repayments to reduce the balance (the amount you’re paying interest on) more quickly will also mean paying less interest.
What about fees and charges?
But interest is not the only cost of your loan – and all the other fees and charges can make a HUGE difference to the overall cost. Here’s what to look out for:
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Set up costs – is there an up-front fee just to establish the loan?
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Admin charges – some lenders charge a sneaky processing fee for every payment you make (imagine how quickly that can add up if you decide to make weekly repayments!) There may even be other charges for things like paper account statements, so be sure to check the terms and conditions carefully.
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Annual charges – Some caravan loans will have an annual service fee which will be added to the balance you still owe (which means you’ll pay interest on it too).
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Late fees – it’s common for lenders to charge a fee for any payments you make late, so be sure to set up a direct debit and leave a bit of a buffer in case of technical delays.
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Early repayment fees – depending on the type of loan and the lender, you may be hit with a hefty charge if you want to pay off your loan early (because the lender will miss out on interest).
What are comparison rates?
As you can see, with all those extra costs (which aren’t always easy to identify upfront) your loan could actually be a lot more expensive than you expect from just looking at the interest rate.
That’s why all lenders in Australia are required to provide a ‘comparison rate’ alongside the basic interest rate. This comparison rate shows the true cost of the loan, including fees you can typically expect to pay if you make regular, on-time repayments.
So how do I compare loan offers?
The first thing to do is make sure you’re using these comparison rates to compare the full cost of each loan. If you can’t find the comparison rate up front, contact the lender as they legally have to provide it.
But don’t forget that terms and conditions can be as important as the costs. Opting for a cheap loan that won’t allow you to make early repayments can mean that you’re stuck paying interest for years (or a hefty penalty fee), even if you decide to sell your caravan and want to pay off the loan. If flexibility is important to you, it might be worth paying a little extra to get it.
If it’s a secured loan you’re after, check whether the terms of the loan restrict the way you can use your new caravan. For example, a loan that restricts you to only personal use is no use if you’re planning to put your luxurious motorhome in your garden and rent it out as an Airbnb!