Financing Your Car Purchase – What You Need to Know

As with any purchase, you have to make sure that you can afford to buy a car. Consider your financial status before you start browsing to avoid compromising your yearly budget for everything else. Ask yourself how you will pay the monthly fees for your new car, who will help you pay for it, how much you should allot for car payments, and how long do you have to pay for it.

In general, most people use cash to pay for the downpayment and simply pay out the balance by monthly fees on installment. For most, this payment scheme is good enough and is simply the best way to do it.

However, some people may not have enough money saved to pay for the downpayment in cash. People with this dilemma can still purchase cars by loaning everything, including the downpayment. Therefore, always consider the possibility that you may have to pay thousands when you buy your car from a particular dealer and this price may be magnified because of the interest rate.

Financing your car purchase is not a walk in the park, but there are many companies that want your business. Shopping for credit unions and banks that offer car loans is one of the things you should do first. Smart consumers consider the credibility of the credit company as well as the annual percentage rate (APR).

When you know which financial institutions have reasonable rates, you can start planning your budget around the loan amount. You’ll notice that some credit companies are willing to finance your car purchase at an APR of less than 2%, but you also have to consider the possibility that this rate could increase on the second year. A bank or a lending company may increase the interest rate at any time, so read the fine print before you sign anything. Changes in fees may compromise your family budget if you’re getting a fixed yearly income.

Loan processing can take hours and even days. The paper work alone can eat up your time in the credit company’s office. You’ll find it easier to apply for a loan if you are already a member of a specific credit union. The lender will spend less time processing your loan if you already have a record with the same company. The company may already have researched your financial status and credit history. Getting approved for a loan is a tedious process, especially for people who have bad credit rating.

There are so many lenders around who are willing to finance your car purchase. If you’re confused, you need to ask people who have experienced taking out a car loan and buying from a particular dealer. The worst that could happen is encountering a dealer who will issue exorbitant interest rates. But how do you know if the interest rate is reasonable or not? You should also consider the model of car you are planning to buy, and the amount of time you need before feeling the urge to buy a new car. Some consumers simply want to drive the latest models, and are likely to change cars in a year or so.

Do not just focus on the downpayment you will need for the car. There are dealers who try to entice you to buy their cars by offering a very low downpayment. In this case, you can almost always expect the monthly payments to be high. Always factor in the monthly payments. Will you be able to spend a certain amount of money every month just for your car considering your regular expenses? If the price is too steep, perhaps you should compromise on the car brand or model. An older model car costs less than a more modern car.

If you are likely to change your car every other year, then leasing a car may be more practical than buying. Many car owners buy their cars only because they do not know about car leasing and its benefits. Most car companies allow consumers to lease their cars for three years on average. Opting for a car lease instead of full ownership means you will have to return the car after a set amount of time. The good news is that there may already be a newer, flashier model by that time and you can switch from your current model to that one by leasing again.

Who should provide your loan? There are local car salesmen who are willing to finance your car purchase, but their interest rates may be exorbitant. A big and stable credit company can be a better option because financing a car is a long-term commitment, and you might as well deal with a company that has rigid rules than risk it with someone who may be fleecing you without you knowing.