The Do’s and Don’ts of Financing a Car
Before financing a car make sure to set a budget, research financing options, get pre-approved, and read before signing. Never spend more than you can afford and avoid minimal down payments or extending the loan term if the monthly payments don't fit your budget
Financing a car doesn’t need to be complicated. With a few simple strategies you can avoid the pitfalls of financing and get a great deal on your auto loan. Get back to shopping for your new vehicle with this handy guide to financing.
1. Set A Budget
It’s important to set a budget to make sure that you don’t end up spending more than you can afford. Take a look at your financial situation with a critical eye and establish how much money you can afford to part with right now for a down payment. It’s also necessary to calculate what you can comfortably pay every month going forward before financing a car.
Make sure that you take into account the total cost of the vehicle including taxes, fees, and interest. Unless this vehicle is to replace one that you already own, you will need to consider the cost of fuel, maintenance, and insurance as well. These costs can be considerable and your budget must account for them.
2. Embrace Research
Buying a new vehicle usually takes some serious research and financing a car is no different. Start by researching and comparing the different financing options at your disposal such as banks, credit unions, dealerships, or online lenders. Take a look at the types of loans they offer and understand the differences between them.
Next you will need to see how your individual financial details will affect the offers that you get. For this you will likely need to visit a number of lenders to see what kind of loans and rates they will offer you. To speed up this process simply head over to myAutoloan and quickly compare quotes from lenders online with no obligation to sign up.
3. Get Pre-Approved
Getting your loan pre-approved demonstrates to the seller that you are a serious buyer who has done their research. A knowledgeable buyer is a deterrent to pushy sales tactics. A pre-approval will let you know exactly what you can afford allowing you to shop with confidence and negotiate a better deal.
4. Read Before You Sign
Once you have chosen your new vehicle and selected the right financing option for you, it’s time to sign the contract and make the loan official. Before you put your name on it, be absolutely sure that you have read it and that you understand all terms and conditions of the loan. If there is anything you’re not sure about or if something isn’t clear you should ask before signing any contract.
1. Spend More Than You Can Afford
Shopping for a new car is exciting and that makes it easy to get distracted by all the options and features. Straying from your budget might seem easy when you’re financing a car but remember that it’s not free money. You will have to pay back what you borrow plus interest.
Don't finance a car unless you are sure that you can afford the monthly payments. Overextending yourself can cause you to struggle financially down the road. This can cause you to damage your credit score which can affect you negatively for years to come.
2. Extend Your Loan Term
When the monthly payments don’t fit with your budget it’s tempting to extend your loan term but this isn’t a good strategy for financing a car. Don't focus solely on the monthly payment without considering the total cost of the loan. While extending the loan term will reduce how much you pay each month it will likely also increase how much you end up paying in interest over the life of the loan.
If the monthly payments don’t fit your budget it’s a sure sign that you are shopping beyond your means. Extending the loan term will not make the vehicle more affordable but it can negatively affect your financial stability. If you end up financing the car for longer than you keep the vehicle you may owe more on the loan than the car is worth.
3. Rely On The Dealership For Everything
If you’re buying your new car at a dealership there is a good chance that the dealer will try to sell you financing too. While this may be the most convenient option it is often not the most economical. Don't assume that dealership financing is always the best choice as they may have higher interest rates and fees.
When it comes to financing a car the dealership is the middleman and there is often a markup on the loans they offer. While you may occasionally find a great offer on a loan you may not qualify for elsewhere, most of the time you’re paying extra for the convenience. That being said it’s good to ask what they can do but always do so knowing what you can get elsewhere.
4. Skimp On The Down Payment
Doing the minimum on the down payment sounds like a good idea when you have a strict budget but there are drawbacks to this strategy. Yes it will leave you with extra money in your pocket right now but you will have to borrow more and pay more interest. Don’t be thrifty with the down payment as it can negatively affect what deals you are offered.
Not only will a small down payment raise the cost of borrowing, it can put you in a situation where you owe more than the car is worth. Since new vehicles depreciate rapidly a small down payment means you will be upside down on your loan the minute you drive that brand new car off the lot. A down payment gives you a head start on your loan and prevents this financially risky situation.
Before financing a car make sure to set a budget, research financing options, get pre-approved, and read before signing. Never spend more than you can afford and avoid minimal down payments or extending the loan term if the monthly payments don't fit your budget. Make sure to shop around if you expect to find the best deal on financing a car.