While the thought of hitting the road with a new car can be exciting, a lot of us approach the car-buying process with dread. Along with getting a car that fits all your criteria and perhaps needing to haggle having a dealer or seller, you need to work out how you'll pay it off.
Many car buyers depend on financing, try not to assume you've to—there are many other tactics. Here are some from the common car payment choices to consider, and what you need to know about each one of these.
Use Your individual Savings to cover a Car
While it might be unrealistic in order to save enough cash to buy a brand-new car outright, it's a wise strategy to pay with cash if you're able to buy an inexpensive car or truck. By paying with cash savings rather than getting financing, it will save you money by not paying interest.
Try to plan far enough ahead that you're in a position to build up a healthy savings account. Consider just how much you'd be paying every month to finance a new car and set aside a similar amount every few weeks. In two or 3 years, you will have a significant sum of money built up that could totally cover the cost of a vehicle (or at least significantly reduce the amount you will need to finance). If you find someone to buy your existing car, proceeds from the sale will go toward funding the purchase.
If you already have a savings account in the form of an emergency fund, it's usually better to avoid using it to cover an automobile unless you are in a really tight spot—your car died and also you don't have another way to make a start, for instance. It is best to keep those funds there for true emergencies, and instead use general savings intended for big purchases.
Find a Low-Interest Auto Loan
Consumers often turn to automotive loans to finance car purchases once they can't pay it off with cash. These are secured installment loans, meaning you repay in fixed monthly installments, and if you can't keep up, you risk the vehicle being repossessed.
When getting a car financed, try everything you can to obtain the lowest possible rate of interest on your loan. Because of the size a car loan, interest can also add significantly towards the total cost of the vehicle. For example, a $12,000 car loan with a 7% rate of interest along with a 60-month term find yourself costing you $14,257 when you've paid them back. That's $2,257 that may have otherwise gone toward a down payment on a home or any other financial goals. Getting that interest rate right down to 4% can save you roughly $1,000 on your loan.
You have several lender options when financing a car:
- A bank or credit union: Check the borrowing options your bank can offer you before you start shopping for a vehicle. They might be in a position to preapprove you for a financial loan having a lower rate of interest than you'd get elsewhere. Once you have the borrowed funds documents in hand, you are able to bring them with you to a dealer to show you're qualified to buy a car up to and including certain price. Remember that financial institutions often charge different rates of interest based on whether the car is totally new or used, as well as the age and mileage on the car. However, dealing with a lender typically means lower loan rates of interest than going through a dealer.
- An online lender: If you would rather not go through your personal bank or credit union, or maybe you aren't able to get approved, many online-only lenders now offer auto purchase loans. These lenders typically offer quick approval and could be more lenient on approval and rates in case your credit isn't in tip-top shape.
- The car dealer: If you don't get preapproved by a lender prior to going car-shopping, you are able to make an application for financing at the car dealership once you've selected an automobile. It might be easier to get approval with the dealership financing office compared to a traditional lender. They'll typically shop the application with several lenders they partner with and provide you with several options to check. The automobile manufacturer also may offer financing themselves, which is called captive financing.The rates you'll get from a dealership might be greater than what you'd get from a bank since the dealership may bump up your rate slightly in order to collect a cut. Some dealerships offer 0% APR promotions or other offers on new cars, so it could be worth going through a dealer if the savings count it. Some dealers even offer financing directly (buy here, pay here), but it is usually geared toward those with poor credit and includes steep fees.
Explore Other Borrowing Methods
There are several other, less frequent ways to finance an automobile. These typically aren't recommended, but this is what you should know.
- Credit cards: Wondering if you're able to purchase a car with a charge card? Dealerships often have limits how much can be put on plastic; however, you may be able to use a card to cover some or all your down payment. You may even be able to spend the money for entire purchase amount with a card depending on dealership policies and your credit limit. If you plan to put a number of all of the car on your charge card, you may want to contact your card issuer first to make sure the big transaction will be approved.
Before moving forward, realize that this payment method could be unwise for several reasons, not the least of which is always that credit card rates of interest are often much higher than automotive loans. Furthermore, carrying a large balance can hurt your credit since it'll drive up your credit utilization ratio. If you cannot repay it immediately, go for an auto loan instead. - Personal loans: Just like automotive loans, personal loans are quick installment loans that are repaid monthly with interest. They differ for the reason that they're usually unsecured loans, if you purchase a car or anything else with a personal bank loan, it can't be repossessed if you don't pay (however your credit will require a large hit). While unsecured loans may be easier for car buying if you're investing in a vehicle from an individual rather than a dealership, their rates of interest are usually higher than what you'd get from a comparable car loan. So if you're looking to spend the least amount of money, a car loan is generally the best choice.
- Borrow from the loved one: If you have a buddy or member of the family willing to give you an interest-free loan, asking for their help might get you behind the wheel of a new car and save you lots of cash in the process. You don't have to borrow the entire amount either; this may be a choice to make up the difference if you don't have quite enough to accomplish the transaction. This process isn't one you need to rely on, though, because it can be difficult to locate and persuade anyone to go through with this particular. Additionally, failure to settle can irreparably damage your relationship with whomever you borrow from. Should you choose choose this option, draft a promissory observe that outlines the terms so your lender can be confident you'll repay.
Steps to consider Prior to taking Out an Auto Loan
If you choose to remove an auto loan to cover your car, do plenty of research before you sign on the dotted line.
Getting preapproved before going to a dealership can help you know how much you really can afford to spend, which can help you narrow down which car to buy. To find the best rate, get preapproved using more than one lender. Your credit rating can impact whether you're approved and what rate of interest you receive; the greater your credit, the greater favorable the borrowed funds terms will be.
When looking at quotes, you will want to consider the loan's rate of interest, term (amount of time over which you have to pay from the loan), any taxes and costs, and the total monthly payment amount. It will help give you a feeling of the total cost from the loan and make sure the car payment will fit within your monthly budget.
If you do take out a loan, you will also most likely have to put some money upfront like a deposit. The more you put down, the lower the borrowed funds balance will be and the less you'll pay in interest charges over the lifetime of the loan.
Improve Your Credit First
If your credit isn't fit at this time and you need a loan to buy a car, it is best to work on improving your credit before you buy. While this isn't always possible if you are currently crunch, if you're able to wait many months, it would be prudent to use that time to increase your credit rating first. To get this done, keep your credit card balances low, reduce just as much debt as possible and pay every bill on time. It is also smart to monitor your credit so that you can make certain your hard work is paying down. Experian Boost™† can also give your credit a bump with the addition of on-time cellphone, utility and other payments to your credit history.