If you’re in the market for a car, you’re going to have to figure out a way to finance it. The average new car purchase is around $37,000.
You probably don’t have that kind of cash lying around, so you’re going to need some help paying for it.
There are many ways to finance a car, you just have to know what your options are. That will give you the best chance to make a smart financial decision.
Read on to discover the best way to finance a car.
In This Post:
The Big Question
The first question that car buyers have to answer is if they should lease a new car, buy a used car, or buy a new car.
It’s not an easy question to answer. The answer really depends on your preferences, budget, and needs.
For example, if you want to buy a more expensive car, leasing may be a good option. Leases have mileage limits, so you’ll want to avoid this option if you have a long commute.
Buying new means that you lose a lot of value in depreciation each year. Used cars are a smart choice from a financial perspective. Cars last longer than ever before. Buying used means that you’re not paying less for depreciation and you still get a quality car.
There are pros and cons with each option, and you’ll have to weigh the financial gains with your preferences.
Set Your Budget
How much can you really afford to spend on your new car? Remember that it’s not just about the monthly payments. You have to account for gas, maintenance, and insurance costs as well.
Typically, you should keep your car payments to about 15% of your income. You want to make sure that you know this number before you start shopping for cars.
You don’t want to have your heart set on a car only to find out that you can’t afford it later on. Worse still, you buy the car anyway and struggle to make the monthly payments.
Save for a Down Payment
The more money you can put towards a down payment, the less you’ll have to finance. That means less interest you’ll pay over the life of the loan.
A car trade-in can go a long way towards the down payment. You have to be cautious about this, though. You rarely get what you think the car is worth.
It’s best to do your research and be honest with yourself about the condition of the car. Car dealers usually low-ball trade-in offers to increase their own profits. The more information you have about the true value of the car, the more negotiating power you have.
Check Your Credit
Your credit score will determine your ability to get an auto loan and the interest rate you’ll pay. The lower your credit score, the more trouble you’ll have financing your car.
You can get a loan targeted towards people with low credit scores. Some of these lenders can be a bit shady and charge outrageous interest rates. You’re better off taking the time to raise your credit score than take out one of these loans.
A good credit score gives you leverage. You get better payment terms and a lower interest rate. If you’re just shy of a good credit score, look to see where you can improve.
One quick way to raise your score is to improve your credit utilization rate. This is the ratio of credit available against how much you use. This is a sign of how much you rely on credit for purchases.
For example, if you have a credit card with a $2000 limit and your balance is $1900, your utilization rate is 95%. That’s extremely high and will drag down your credit score.
There are a couple of ways to bring this ratio down. You can ask for a credit increase. A $4000 credit limit with the same balance can bring down your ratio to 47%. That can result in a huge credit score bump.
The other way is to pay down your balance as quickly as possible. You generally want to keep the credit utilization rate at about 30% for the best score.
Shop for Loans
If you look up auto loans online and you’ll see a lot of options. You owe it to yourself to shop around for loans to find the best rate possible. You’ll want to take a close look at this article that shows you how to shop around for online auto loans.
Auto loan lenders realize that cars are more expensive to own and maintain. People may not be able to make loan payments over three years. In an attempt to make payments more affordable, they extended the terms of auto loans.
You can pay off your auto loan in 5 years, 6 years, or even 7 years. There’s a growing trend for 7-year loans because the monthly payments are lower and people are keeping their cars longer.
What consumers realize is that it’s really a bad financial choice. You’re going to pay a lot more in interest for those lower payments.
You’re much better off buying a car that costs less, even if it’s a used car and paying off the loan in a shorter time period.
When you do find the right auto lender, be sure to get preapproved. When you have a preapproval letter from your lender, it’s a little like walking into a dealership with cash.
Dealers will take you very seriously and they will be open to negotiating the final price of the car. They don’t want to see you walk away without buying, so keep that in mind when negotiating.
The Best Way to Finance a Car
You’re about to make a major purchase. Buying a car takes careful consideration. The financial implications can haunt you for years to come.
The best way to finance a car is to buy a car that you can afford. You want to raise your credit score as much as possible and get a loan that doesn’t cost you more in interest.
Do you want more great financial tips? Come back to this site again for smart financial advice.