When it comes to buying a car on credit, it’s essential to know the different aspects that go into financing a car. Most of the time, it’s best to pay cash for a car, but if you can’t, at least understand how to finance it in the best way possible.
1. Know Your Credit Score First
Don’t even try to get a loan for a car until your credit score is over 650. The main reason is that the interest rate will be ridiculous if it’s not more than that. Cars are not investments because they depreciate so quickly, so when it comes to interest, you want to pay as close to nothing as possible.
2. Know Your Budget
Before you even start looking, you need to know how much you can afford to pay, including the loan, insurance, fuel and maintenance costs. Buying on credit can sometimes encourage people to buy more than they can comfortably afford. A car payment plus expenses should never be more than about 20 percent of your disposable income.
3. Get a Loan from Your Bank
Going to your bank or any bank to get a loan is going to be a lot better for you than going to the dealer, most of the time. You’ll be able to loan shop without having the car you want on the line, which will help you feel less pressured.
4. Go to a New Financial Institution
If your bank is not helpful with loans, you may want to try other financial institutions that offer car loans, or you may want to join a credit union which is often better about low-interest car loans.
5. Ask the Dealer for Financing
Sometimes you can get a good deal from a dealer, especially if you have excellent credit. If you go in with a good deal already from your bank or credit union, you’ll actually end up with a better rate from the dealer too.
6. Keep Your Loan Term Short
The shorter the loan, the better, because your car is losing value fast and having a big loan too long will make you "upside-down" in terms of your worth. If you owe $10K on the car and it’s only worth $6K (which often happens when financing), it will reduce your credit rating.
7. Pay at least 20 Percent Down
Your car will lose value, especially if it’s new, the moment you drive it off the lot. But, if you pay a down payment, it’ll lower your interest rate, increase the value versus what you owe, and practically ensure you’ll get approved for the loan if your credit is also good.
8. Don’t Finance Taxes, Fees, and Extras
Every car comes with these fees. Don’t finance them into the loan. Pay cash for this part of your purchase. There is no reason to pay interest on this part of your purchase because it’s just adding to the amount you pay for no benefit.
9. Apply Online
One way to get a good deal when it comes to loans is to use one of the online loan applications that will send your loan request to many financial institutions. If you have good credit, you may get many offers to choose from.
Financing a car is one of the ways you can get a good car without having the cash. However, be aware that a car is not really an investment, and you’re going to lose at least 20 percent of your car’s value the moment you leave the car lot. However, if you can afford the loan without a problem and you get a very low to no-interest loan, it can be worth it.