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The Best Way To Finance A Car

September 28, 2020 | Vehicle Financing

Cars are one of the most expensive purchases you’ll make. Whether you are looking to purchase a brand new vehicle or a used car, most people don’t have the upfront cash to pay in full. Because of this, financing a car is a typical process. So, it’s important to be aware of the factors to consider for the best way to finance a car, along with the options available to you.

What Personal Factors Do I Need to Consider?

Before you decide to finance a car, it’s important to consider some personal factors that may limit your options. These include:

Your credit score – Many loans are limited by your credit score, so it’s essential to be familiar with the approximate value of your score before shopping.

Your budget – Approximately how much are you willing to spend each month on a car loan? How much do you want to pay overall? How many months do you want to pay?

Your personal transportation needs – There are differences in financing a used versus a new car. Think about your personal needs before deciding what type of car to purchase. Do you drive extensively for work or travel? If so, a new car may be the best option for you.

Do you want to lease or buy? – Leasing a car is like renting an apartment. At the end of your lease, you will return the car. Leasing typically has a low to zero down payment and lower monthly rates with options to get a new vehicle every few years. On the other hand, financing a car means that once you’ve made the last payment, you own the vehicle.

Should I Buy Used or New?

A new car is an exciting purchase; used cars can also be a smart purchase. However, the terms of your car loan may be different depending on the type of car you choose.

New car loans have a higher total amount, but car dealers will have some incentives in place to encourage your purchase. These incentives may be a lower APR for a period of time, a cash bonus, or free services. So, interest rates could be lower, but the total amount and time to pay off the loan are typically higher.

Used car loans are usually lower total amounts, but with higher interest rates. This is a trade-off with a shorter time to repay.

Shorter times to repay are important for used cars that may have mechanical issues before the end of the loan. If you finance a used car for seven years, but during year five, it becomes undrivable for some mechanical reason, you will still have to pay off the loan while likely adding another car loan to your monthly bills for a replacement vehicle.

Deciding on the Best Way to Finance a Car

After you’ve considered your credit score, monthly budget, personal needs, and decided on a type of car to purchase, it’s time to start shopping. But not for cars – yet!

First, you should shop your loan options. Research them thoroughly so that when the dealer offers you an interest rate, you know if you’re being offered a good deal. This is where credit unions typically shine.

Get multiple quotes and compare them using a car loan calculator. Make sure to consider how much money you’re spending in total and look closely for hidden fees. Just because you’re paying a lower rate per month, doesn’t mean that you’re saving money in the long-run. Be conscious of interest rates! Once you know which loan you’d like, you can apply for pre-approval.

Being pre-approved for a car loan is one of the best negotiating tactics you can bring with you to the dealership. Start looking relatively close to when you want to purchase—if you inquire about pre-approval for any loans you’re interested in within two weeks, only one credit inquiry will be registered on your credit report.

What to Know When Heading to the Dealership

Now that you know how much you’d like to pay for your car in total, and have a loan pre-approval in hand, you are ready to shop for your new ride.

When you’ve decided what car to purchase, it’s time to play your pre-approval card. The dealership may be able to counter your offer with a lower interest rate, but again, beware of hidden fees, longer terms, and definitely calculate the cost of the loan over its whole life. By this point, you’ll be an expert in calculating total and monthly cost. Use that practice to verify if the dealership is actually offering you a deal.

Learn More about Auto Loan Financing & Terms

Car loans can be confusing, and one of the most difficult parts to decide between is the length of financing.

Check out our advice on when a 72-month car loan makes sense. We can help you decide the best length of financing and interest rate for you.

When a 72-Month Car Loan Makes Sense

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