When it comes to financing a car, you may find yourself turning to friends or family for advice. Everyone’s circumstances are different, and we believe that equipping yourself with knowledge is the best way to make an informed decision based on your unique needs.
Here are four main factors to consider when financing a vehicle:
- The amount being borrowed
- The interest rate on your loan
- The length of the loan
- The model year of the vehicle
When borrowing for a car, the loan amount includes the total cost of the vehicle, along with taxes and fees, minus any trade-in allowances or cash down payment. If you have an existing car loan, you'll need to settle any outstanding debts. Calculating all these costs will help you to better understand the full amount you'll be financing and what you can expect in the upcoming years ahead.
The most important factor to consider when financing a car loan is the interest rate. The interest rate on your loan greatly impacts the total amount you’ll pay over time. This can turn into an overwhelming situation when you do not take the time to secure a favorable interest rate. To receive a good rate, you'll need a good credit score or a co-signer. If you choose to have a co-signer, it's crucial to make your payments on time to avoid negatively affecting their credit.
Another factor to consider is the length of the loan, which affects both your monthly payments and the total interest paid over the loan's life. Longer loans often have lower monthly payments but higher total interest costs. Aim for a loan term that balances affordable payments with minimizing interest costs.
Lastly, older vehicles may be in good condition and have low mileage but might not be eligible for financing due to their age, depreciated value, and other factors that lenders consider.
Tips for Successful Car Financing
Improve Your Credit Score
- If your credit score is less than ideal, consider building it up before applying for a car loan.
- Save 10-20% for a down payment, this can help you secure better loan terms.
- Avoid "hard" credit inquiries, as they can negatively impact your score. "Soft" inquiries do not affect your credit, so always ask before a credit check is submitted.
Deal with High-Interest Rates
If you find yourself being offered a high-interest rate, work on improving your credit score before committing. Alternatively, save up and pay in cash to avoid financing altogether.
Avoid Being Upside Down
Being “upside down” on your car loan means you owe more than the car’s worth. To avoid this, ensure you’re financing a car that retains its value well and make a significant down payment. Also, make an effort to put additional cash towards your loan with each payment to reduce the interest accumulated and pay down the loan faster. Most lenders do not have penalties for early payout on car loans.
Choose the Right Lender
When you’re ready to purchase a vehicle, a trustworthy, established dealership will have access to numerous finance companies, banks, and credit unions, to secure the best rates. Don’t just settle for your current financial institution—compare terms and rates to find the best deal. Speak with your auto sales representative for guidance.
In conclusion, financing a car doesn’t have to be a daunting process. By understanding the key factors involved and taking steps to secure favorable terms, you can make a smart financial decision.
