A Few Things You Need to Know Before You Finance a Car
Once you’ve made the decision (or your old heap has made the decision for you) to buy a new car, the fun part comes in choosing the style (fast-and-furious or family-friendly), the color and the options.
Not so much fun will be figuring out how to pay for it. While there are some people who have the cash to plunk down on a new car, most people find they need to find a way to finance it. Even if you do have the cash to pay for a car, you should think hard about whether using cash this way makes the most sense.
Three things to consider about paying cash for a car:
1.It might make sense to pay cash if you have a bad credit rating and will have to pay high interest rates.
2.Think about how much you will pay in interest to finance a car vs. how much you can earn investing that cash or putting it in a savings account.
3.If you have a lot of debt AND a lot of cash, you might be better off paying cash so you don’t add to your level of debt.
The Type of Financing
Deciding on how to finance a car depends a lot on individual circumstances, including how long you usually keep a car, how much you drive it (the less you drive it, the longer you can keep the car in great shape) and your credit report.
There are three main options for car financing:
A lease, also known as a PCP (Personal Contract Plan)
Advantages: Usually has lower interest rates and flexible loan terms; good for drivers who prefer a new car every few years; lease terms vary in length to suit specific needs.
Disadvantages: Usually require an upfront deposit; you are financing the car while you drive it and at the end of the lease either turn the car in or make a balloon payment to keep it. Lease terms usually require a maximum mileage per year; you will pay extra if you go over the limit.
A standard car loan
Advantages: The loan is secured against the car so interest rates are usually lower; flexible loan lengths from two to seven years are often available; at the end of the loan you own your car.
Disadvantages: If you accept a loan from the car dealership you often have to face a “hard sell” on adding extra options or services to the financed amount. Banks and credit unions offer auto loans, too, often with competitive rates and less of the hard sell – but you can’t always arrange one during the evening or on a weekend, which is when most people buy cars.
A personal loan
Advantages: Flexible loan terms, simple approval requirements and low minimum amounts (which works well if you want to pay some cash and finance part of the car). You can sell the car without repaying the loan since they are not tied together.
Disadvantages: Possibly higher interest rates since the loan won’t be secured by the car.
One more comment about personal loans vs. car loans: Some people think that car dealers will give you a better deal if you come in with “cash” – which is really the proceeds from your personal loan. But not everyone agrees with that opinion. Some car dealers get a commission when they arrange a loan, so it’s possible they will give you a better deal when you use their financing.
Three more considerations about car loans:
- Interest rates depend on your credit. The better your credit, the more favorable your interest rate will be. If you know you will be financing a car in the next six months, be sure to request a copy of your credit report and do what you can to improve your credit.
- APR. This stands for “annual percentage rate” and includes all fees as well as the interest rate. Be sure to compare APR’s to APR’s when comparing loans.
- Length of the loan. You can lower your monthly payments by extending the length of your loan, but be sure you are not overextending that loan beyond the life of the car. Most financial experts recommend a car loan of a maximum of four years. After that, you end up paying for a worthless car.
Filed Under: Car Insurance • Insurance Tips
