Given the fact that cars are so expensive, most people explore their options with financing a vehicle when they need one. While saving up to pay for a car in cash is one of the best alternatives to financing, it is not always the most realistic since you may need a vehicle before you have enough savings lined up.
If you do choose to finance your next vehicle, you can do so in a way that’s financially savvy and doesn’t allow you to end up losing money. Here are 5 things you need to know before financing a car.
Have a Credit History
In order to even receive a car loan, you have to have some sort of credit history. It doesn’t have to be a perfect 800 score but you can’t expect to get a car with no history at all. When you take out any type of loan, the loan officer wants to see that you have a positive borrowing history and pay back all your debts and bills on time.
If you don’t have a good enough history keep in mind that you can get a cosigner. Some people rely on parents or other relatives to do this and as long as you commit to making on-time monthly payments on your loan, the situation should work out well for you and the cosigner.
Credit Inquires
If you’re going to a dealership to finance a car, be prepared for your credit to be pulled multiple times. The financing department will sometimes contact several lenders to compare interest rates and terms in order to help you find the best payment and rate to match your needs. They will most likely be hard inquiries and may take up to two year to fall off your credit.
Your credit score may even decrease after all of those inquiries are added but as long as you keep making on-time payments and keeping your utilization low you can always increase your score in the following weeks.
Length of the Loan
The loan term you consider and choose is very important. In recent years, loan terms have been getting longer and longer ranging anywhere from 48 months to 84 months which is just ridiculous. If you mention that you are on a budget or would like a smaller monthly payment, the financing company may try to sell you on a longer term because while that will keep payments low, it will also drag out the life of your loan and could have you paying on your car for 5-7 years.
It’s also worth mentioning that your car will depreciate over time even while you’re paying off your loan from financing it. When I financed a car two years ago, I secured a low monthly payment with a 5 year term. I often ended up paying for repairs, maintenance, and my car loan plus interest during some months which completely drained a large portion of my income. I paid off my loan in about 1.5 years to save on interest and I honestly couldn’t imagine paying on a car for several years because cars don’t last forever. After 5 years, you may want to get a new one which could restart the financing process all over again.
Try Your Credit Union or Bank First
To avoid the high-pressure sales atmosphere that most car dealerships promote along with having your credit score run multiple times, consider going to your local credit union to obtain a loan for the car you want. Credit unions are definitely more low key and flexible. The operate on a more personalized level and if you have an account with them and are in good standing, you should have no problem obtaining a low-interest loan for your car.
I actually found this out the hard way when I went to a dealership to finance a used car with a high interest rate of 15.59%. My fiance who has a lower credit score than me went to his credit union to obtain a loan for a car he wanted to purchase and received a much better rate of 3.5%.
It’s Not Really Your Car
When you finance a car, keep in mind that the car is not yours until you pay back the loan in full. This means you if you get behind on payments your lender can easily repossess your car. You also have to meet certain auto insurance requirements when you finance a car to protect your lender if the car ever got severely damaged or totaled before you were able to pay back the loan.
While financing may be a suitable way to obtain a car you want or need, the end goal should always be paying off your loan in full so you can own the car and do what you want with it. Before you finance check your credit, compare lenders and their rates, and try to put as much down as you can.
Do you think financing a car is worth it? What tips do you have about taking out an auto loan?
Chonce is a freelance writer who’s obsessed with frugality and passionate about helping others increase their savings rate, eliminate debt, and work toward financial stability. She chronicles her journey to becoming debt-free on her blog, mydebtepiphany.com.
