Whether you are buying used or new, a car is still a significant purchase. It can seem overwhelming, especially when you haven't decided on a financing option. Once you understand the basics, financing a car won’t be that complicated.
There are several financing options you can pick from and a few factors that determine the interest rate you get. Paying cash for a new car may not be possible. That's why most people prefer finding a way of financing or leasing a vehicle.
You can get the finances from a friend or family member, a bank, an online financial institution, or a dealership. There is usually a credit agreement between you and the lender that gives you a chance to pay for the car over time.
You have to weigh all the options because that is how you find the best rates. This article will show you how to finance your car in the best way possible.
Financing Your Car through the Dealership
When you finance your car through the dealership, they will send your credit information to all the lenders they work with. If any of them show interest in financing your vehicle, the dealership will choose the offers to give you. The manager will take the lowest interest rates and increase them before presenting them to you. That is because they have to make a profit from your financing.
No law requires the dealership to tell you if they increased the rates. So you may never know sometimes. You must carry your negotiation skills to the dealership to ensure you get the best deal. Treat the financing as another product the dealership is trying to sell you. You will notice there is a lot of room for negotiations.
Factory-to-consumer rebates are offered directly to you as incentives to make you buy a specific car. If there are specific cars that have sat on the lot for a long time and they want to offload them, they will try to lure new buyers like you. Don't let the salesperson use rebates to make your purchase price lower. These are dealer's packages that should affect your negotiations.
You should consider zero percent interest if you come across the offer. But you should know that you must agree to a shorter loan term for you to get zero-percent financing. That means you will have to complete payments before 24 to 36 months. The monthly payments will be high, but at least you will finish paying the loan faster.
Qualifying for a low-interest rate is not easy. If your credit score is lower than 680, low rates may not be possible. You might also lose the cash rebate if you go for the low interests. Before you drive off with your new car, ensure everything is spelled out correctly on your contract.
The bottom line is how much you will pay for the whole car, not the monthly payments. Your monthly payment might be low, but the amount you end up paying, in the end, will be very high. You can negotiate any payment level when your loan term is long enough.
Things like extended warranties, alarm systems, and insurance might add to the initial costs of buying a car. When you are negotiating the price, try to consider all these things as well.
What Determines Your Interest Rate?
The interest rate varies greatly depending mostly on your credit score. Most lenders will look at your credit history to determine your loan worthiness and how much interest you should pay. It shows the lenders what amount of risk they are taking by giving you the car loan.
The length or term of your loan will also affect the interest rate. Shorter loan terms have low-interest rates. But it means you will pay a high amount monthly. Also, new cars have lower interest rates compared to used cars. Your location might also factor in the financing rates.
Shopping Loan
You have to shop for a loan before shopping for a car. It can help you avoid the high cost of financing your vehicle through a dealership. Figure out your finances first and see how much you can raise as monthly payments before looking for a car loan.
Some online calculators can help you decide your total car purchase price. You will end up with a car you can easily afford. By approaching your car purchase from this angle, you will have a much easier time. If you wait until you are at the dealership to start looking for a finance option, you might end up with a bad deal.
Start with your bank before you consider any other lender. You already have an ongoing relationship with them; it can be easy to get a great deal. Look at their rates to see if you can afford them. If they are not favorable, you can look at credit unions. Some credit unions require you to be a member before they give you such a loan.
The other option is getting a home equity loan and paying cash for your new car. An equity loan rate may be better than what car loan lenders will offer you. But this is only possible if you are a homeowner. Getting a car loan from a friend or family member can also work. You can pay it flexibly, and since you know each other, the terms will be favorable. The only risk is destroying your relationship.
When you are shopping for a loan, don't let everyone run your credit score unless you think they can finance you. Sometimes running your score many times can decrease it. Some dealers might insist on running your credit score even if you pay cash. If all else fails, you can consider financing the car through the dealership. But before doing that, ensure you look for a loan everywhere.
Cheat Sheet
Ensure you go through this list before going car shopping.
- Figure out how much you can spend on a car
- Find out if you can trade-in your existing car before buying a new one
- Look for loans with low interests and compare them with what the dealer offers
- Polish your negotiation skills
- Have a copy of your credit report and ensure it doesn’t have errors
- Visit the car manufacturer’s website to see if they offer any incentives or deals
Final Thoughts
Financing a car becomes much easier when you figure out where your loan will be coming from. Many lenders are willing to work with you as you purchase the vehicle. Look for the one that offers a low-interest rate and a reasonable loan duration. Don't be afraid to negotiate even lower interest if you are using dealership financing. Most of the deals they give you are exaggerated. If you do not negotiate, you will end up with a bad deal.
