The Complete Guide to Financing Your New Car

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The Complete Guide to Financing Your New Car

Buying a car is a big step. There are many factors to consider, from the price of the car to the costs of maintaining it. While there are a few people who buy cars outright with cash, most people finance the cost of the car with a loan. Understanding how to finance a car is the best way to get yourself on the road quickly.

Know Your Budget

Before you start the buying process, you will need to have a general idea of how much you want to spend on the car. Remember that the cost of the car will far exceed the purchase price shown on the window. You will need to factor in the cost of gasoline/fuel, monthly maintenance, insurance, parking, tolls, and registration fees. If your area requires an annual inspection, you will need to factor in that cost as well. Also, it helps to have money set aside for unexpected emergencies like car repairs.

Shop for Your Car

The next step is to start thinking of the car that you want. This will affect your budget and the overall cost of the car. Do you want a four-door sedan or a two-door coupe? Do you have a large family and need a minivan? Do you want a sports car? An SUV? Do you want a specific make of car? Ford? Toyota? Do you want a brand new car or a used one? Used car finance rates often differ from those of new cars, so it pays to consider both when thinking about the car you want. Start searching for the car that best fits your needs and compare prices to find one that fits your budget. There are many great websites that will allow you to search for your ideal car by size, make, and model.

Line Up Your Financing

The most important part of this process is to line up your financing. If you have a relationship with a bank, reach out to them first to find out about auto loans. The second best choice is to join a credit union and take advantage of lowered rates for auto financing. If neither of these two options works, you can find out what kind of financing the dealership offers.

The financing terms you enjoy will ultimately depend on two major factors. The lender will look at both your income and your credit score to determine what kind of terms you will get for your loan. Lenders offer the lowest interest rates to borrowers with the best credit scores. These scores tell the lender that you have a history of paying your debts on time, so they will be more likely to take a chance on lending to you. If you have struggled in the past with re-paying debts, lenders will likely offer you loans with higher interest rates. If you are buying the car from a private seller, you can get a loan from your bank and write a check to the seller from your account. There are also ways to arrange for your lender to pay the seller directly.

Check Your Credit

Before you go to a lender for a car finance, check your credit so that you know where you stand, financially. It pays to know your credit score and your debt to income ratio to have a better idea of what types of loans you may qualify for. You can then use that to compare rates between lenders (the bank, credit union, and dealership) and choose the most favorable terms.

Once you have checked your credit and know what type of rates you would likely qualify for, there are certain things you need to be aware of before you go to buy your car. First, don’t make any major purchases or open any new lines of credit. Some people check their credit and see that their score is better than they thought. They then use this information to get new credit cards or loans. Don’t do this. Opening up new lines of credit can drop your score drastically, making it harder for you to get the auto loan.

Buy the car first, then start thinking about other large purchases like houses, boats, and furniture. The key is to keep your credit score the same (or raise it) when you’re trying to buy a car. There are many websites that offer advice on how to increase your credit score quickly. Be careful here, as some “tricks” that these sites teach can often hurt, instead of improve, your credit score.

How Your Credit Score Makes a Difference

Your credit score is a huge determining factor, not only in what loans you get approved for but how much you pay over time. If your credit score is in the highest tier, between 760-850, you will qualify for the lowest interest rates. The average interest rate for someone in this tier is about 4 percent. When your score drops to the next lowest tier, between 700-759, you would pay, on average 5.8% in interest. While this doesn’t seem like a big difference, it equates to paying an additional $728 on a five year loan.

The biggest gap, however, is between the borrower with the highest score and the lowest tier score. If your score falls in the lowest tier of between 620-639, you would pay about 16 percent in interest, adding about $8,000 to the price of the loan over a five year period. $8,000 is a lot of extra money to pay for your car loan, so make sure your credit is in order before you start thinking about financing a car. Moreover, used car finance rates are often a bit higher than those of new cars, so it pays to keep this in mind when deciding on a car.

Lower Payments vs. Lower Interest

One of the things that confuse people about car loans is whether to finance the car for a short period of time for a higher price or to finance it for a longer time at a lower price. While it may seem like a better deal to get a low price per month on your loan, it is often more expensive in the long run. Lenders will often stretch out a loan for five, six, or even seven years to make it easier for you to pay it off. Instead of the borrower paying $569 a month for 36 months on a $20,000 car at 5 percent interest, the lender may offer you the option to only pay $305.99 a month for 72 months. While this looks good on the surface, you end up paying more over the life of the loan.

$20,000 purchase price

36 month term

$569 per month payment

=$1,500 in interest over 3 years

$20,000 purchase price

72 month term

$306 per month payment

=$3,031 in interest over 6 years

Your monthly payments are lower but you end up paying more than double the cost of the loan over time. Your best bet is to pay off the loan as quickly as possible in order to save on interest charges. Find out if your loan offers pre-payment with no penalties. This way you can get a longer loan for a cheaper monthly payment, then make extra payments each month on top of the minimum. It’s better to get a lower monthly payment then make additional payments than to go for the shorter term and struggle to make the payments each month. Use a car finance calculator to compare the difference between the lower payments or the

Down Payments and Other Cash

When you have checked your credit, decided on a car, and found favorable interest rates, you may be considering what type of cash you will need to complete the purchase. Most lenders will require a down payment of some amount. This amount is usually about 20% of the purchase price, so on a $20,000 car, that would be about $4,000. There are some lenders who will complete the loan with less cash down, so it pays to shop around for the best deal. In some cases, you can get a lowered interest rate by putting down more money upfront as a down payment. If you have less than perfect credit, a larger down payment will make it more likely that a lender will take a chance on offering you a loan. Again, using a car finance calculator can help you to determine how your down payment makes a difference in how much you pay each month.

Borrowers with the highest credit scores often find that they qualify for loans with no down payment required. This is another reason that it pays to shop around for the best loan terms when it is time to buy your new car.

In addition to the down payment, you will also need money for insurance, taxes, fees, and tags. Just as you shop around for the best deal on financing, it pays to shop around for the best car insurance rates. Your credit score will also have an impact on how much you pay for car insurance. The drivers with the best credit scores often get the best rates on insurance as well.

You will also need to pay fees for emissions inspections, tag fees, licensing fees, and vehicle taxes, so it helps to have additional money set aside for these fees in addition to the down payment.

When it comes to car finance, there are a lot of factors to consider. The price that you pay for the car far exceeds the purchase price when you factor in taxes, fees, insurance, interest, and other charges. Understanding your credit score, how loan terms work, and how to pay the lowest price for your car is vital to getting a car that you will enjoy for years to come.

FAQ

Does financing a car build credit?

If you want to borrow money to make a vehicle purchase and you’re not sure if borrowing will improve your score, here’s the answer. The answer is no, it will most likely lower your score on the credit report due to the debt generated by taking out the loan. Also, your credit report can be viewed by multiple lenders for a credit application and new inquiries will be added to the account. However this does not mean that asking for a vehicle loan to the auto lenders is bad, it is normal that it happens and the recommendation is to comply with the loan payment on time so that the scoring number of the car buyer returns from where it was and if he wants to have an excellent credit he just has to improve his credit history by cleaning it up and paying off the missing debts. 

How do you get approved for a car loan?

In order for a car lender or a financial institution to approve your loan, you need to complete all the necessary requirements presented in the Loan Term. First of all, you must have a good credit score because it reflects the management, and responsibility you have when payments are made. Moreover, with a bad payment history and outstanding debts, you will most likely not be considered for preapproval of any loan option thanks to the bad credit. Whether or not you apply for credit, you need to review your finances. Besides, you must have a secure source of income so that the lender has the confidence that you will pay it back because unlike an unsecured loan, this is usually a secured loan. Finally, it is necessary to have all the legal information they ask for so that they can evaluate you and reach a financing deal.

Is it better to finance a car through a bank or dealership?

You can’t finance a car by choosing the first option you see, you always have to look for more options and make a previous analysis of them to see which one works best for you.  Financing a car through a bank or a car dealership is a good option, but it will always depend on your financial status, your credit history, your income, or even your savings to choose a financing option. Banks will give you a quote when you apply for a car loan, they will have an auto loan rate and it will depend on the credit score, you can opt for online banking. Dealership financing may not have a higher interest rate than banks but it will depend on the processes you use, it is not a bad option and also banks can offer good options with a future benefit. All you have to do is select information from each participating dealer and choose which dealer financing best fits your wallet to make the car payment.

Are cars a waste of money?

Having transportation is a necessity, mobilization requires time and by transporting ourselves we can shorten it and have more time for more important activities. Public transportation helps the needs of many people since it is cheap and well-organized. although, buying a car makes it more exclusive for someone who needs constant mobilization. Anyway, buying a car is very expensive and the lease of one for daily use is not profitable, it has to be done when possible, as we could lose a lot of money. Nevertheless, it depends on the amount of money you have. There are people who don’t mind buying any new car, and for others it is impossible. In the case of people who are struggling with their financial situation, it is best to seek professional help from a financial advisor, or accountant. With financial calculators or simply a car loan calculator your accountant will take care of getting the results and also evaluate your possibilities, to finally ask for a personal loan and go for the best option. Additionally, if you can’t afford a car, consider a motorcycle loan unless it’s not your preferred style of transportation. 

Carlos Andrews
Author

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