Car Financing: Tricks & Tips
What are the best tips and considerations to take before deciding to finance a car?
Financing a car can pose challenges - this article aims to provide valuable tips to assist individuals in making informed decisions.
By The Editors
Fri, May 19, 2023 04:14 PM PST
Whether you are contemplating purchasing a brand-new vehicle or a used one, it's imperative to thoroughly evaluate your financial situation and understand the loan process. The goal is to steer clear of the pitfalls associated with unfavorable car loans. To that end, this article will present six essential tips to guide readers through the car financing journey.
Tip 1: Prioritize Knowing Your Credit Score Before Shopping
Before embarking on your car shopping journey, it's vital to familiarize yourself with your credit score and understand its significance. You can still obtain a car loan, even with bad credit, although at a significantly higher interest rate. The lower your credit score, the higher the interest rate you can expect. Another option is to avail of a personal loan from someone like Space Coast Credit Union. However, the interest rates might be a little higher.
Knowing your credit score enables you to estimate your monthly payments accurately, determine the loan amount you can qualify for, and establish a budget for purchasing your car.
Tip 2: Seek Financing Quotes if You Have a Low Credit Score
To bring your car buying plans into reality, obtaining financing quotes is a practical step that complements the first tip. These quotes will give you a realistic understanding of what to anticipate with your loan and help you assess what you can feasibly afford.
Additionally, you can approach banks or lenders with whom you have a positive payment history. Building on your established rapport, they may offer you a lower interest rate compared to other lenders due to loyalty considerations.
Tip 3: Opt for a Shorter Loan Term Within Your Affordability Range
While it may seem tempting to secure a loan with a longer duration, doing so can lead to higher interest payments and potentially create future financial challenges if you decide to trade in or sell your car. Choosing a shorter loan term may result in higher monthly payments, but it saves you money on interest in the long run.
By paying off your loan sooner, you minimize the overall interest amount. Moreover, longer loan terms can pose a common problem when selling or trading the car, as its value may not align with the remaining loan balance.
Tip 4: Allocate 20% as a Down Payment
One of our top recommendations to customers is the importance of making a down payment. As a general rule, aim to contribute 20% of the total car cost as your down payment. The more you put down initially, the less you'll need to finance through a loan, ultimately resulting in long-term savings.
Tip 5: Pay Additional Dealer and Extra Fees in Cash
When financing a car, various additional fees are not initially included in the loan amount, such as documentation fees, license fees, registration fees, sales tax, and more. It's essential to pay these fees separately, in cash, rather than rolling them into your loan.
Although dealerships may allow you to include these fees in the loan, doing so will increase your debt and subsequently raise your monthly payment. By paying these fees upfront, you avoid accruing additional interest on the loan amount.
Tip 6: Consider the Benefits of Gap Insurance
Gap insurance, or guaranteed auto protection insurance, is an offering provided by car dealers and lenders to protect your vehicle. It covers the financial "gap" between the assessed value of your car by your insurance company and the amount you owe on your loan.
In the unfortunate event of an accident that results in a total loss of your car, regardless of fault, this insurance ensures that you won't be left with any remaining debt if your insurance deems the car's value lower than what you owe.
For instance, if your car is valued at $10,000, but due to interest calculations and depreciation, you still owe $12,000, gap insurance will cover the $2,000 difference.
When to Consider Refinancing Your Car Loan
When considering refinancing your car loan, it's natural to wonder, "Can refinancing a car hurt your credit?" However, rest assured that if you have a good credit score and a relatively new car, refinancing can be a beneficial solution. Much like the process of refinancing a mortgage, exploring options for auto loan refinancing is recommended. Request quotes from various lenders, including your current one, and take the time to visit your local credit union for potential alternatives.
During the decision-making process, it's important to inquire about any application or initiation fees that may be associated with the new loan. Additionally, it's advisable to steer clear of lenders who suggest lowering your monthly payment by extending the loan term. The objective is to secure a lower interest rate while adhering to the same or even a shorter repayment period. By doing so, you can potentially improve your financial situation without negatively impacting your credit.
In conclusion, financing a car requires careful consideration and planning. By following these essential tips, you can navigate the process with confidence. Also, check out this handy list of things to keep in mind when buying a car, it might prove really helpful in your shopping endeavour... And if you ever find yourself in an unfavorable situation, remember that refinancing can provide an opportunity for improvement.