How Should You Finance Your New Car?
Financing your car purchase through a lender is one way to get your new vehicle. You borrow the money from the lender and repay the debt in accordance with the loan agreement you signed.
Unlike paying in cash, you’ll have to pay interest and other fees for the privilege of borrowing the money. Before you sign on the dotted line of a car financing agreement, here’s what you need to do to ensure you’re making the right financial decision.
Know What You Can Afford
Making an accurate budget before taking on a new payment is crucial. If you can’t afford the car payments, you’ll lose the vehicle and all the money you put toward the debt up until that point. The lender has the right to repossess your car and sell it to offset loss if you default on the loan.
Review all of your household bills, income and spending habits over at least the previous six months to determine how much money you have coming in versus going out each month. Use these figures to pinpoint the highest car payment you can afford so you’re shopping for cars in the appropriate price range and are not tempted to overspend.
Be incredibly realistic about your bills and spending habits, and don’t commit to changes you can’t stick to. For example, if you need to cut your daily coffee run and weekly meals to cover the cost of the car payment and leave you with a savings cushion, try doing so for a least a month before you finance the car. You must be able to follow your budget to ensure you’re not going to run into problems paying your auto loan down the road. Savings cushions vary by financial situation, but experts often recommend you have six months’ worth of your income stashed away.
Look at Your Credit
Your credit report and score play an important role in your ability to get reasonable car financing terms. If your score is low and you have negative entries on your report, your loan offers may include a lot of fees and high interest rates. With poor credit, you can wind up paying hundreds or even thousands more in financing charges than someone with a good credit score and history.
Try cleaning up your credit report by paying off old accounts and having inaccurate entries removed before applying for financing if possible. Your score will rise over time as you work on your report and improve your credit habits, and you’ll be rewarded with more favorable financing terms as a result.
Find Your Car
Once you have an idea of what your credit is and how much of a loan payment you can handle, you can set the high end of your car price range. Use loan calculators, available on financial websites, to estimate your monthly car payment based on your total estimated loan amount.
Whatever you do, don’t finance more than the highest price you’ve calculated you can afford based on the potential monthly payment amounts. Car dealers sometimes offer to bundle in extras when you’re financing, but this adds to the total loan cost and will raise your payments.
Get Loan Comparisons
Obtain loan quotes from multiple lenders. While it may be tempting to take the first deal you’re offered by the car dealership or auto manufacturer, you need to shop around to find the best loan terms available to you. A difference of just one or two interest rate points can cost you thousands over the life of the loan, so due diligence is necessary for your wallet’s sake.
When you’re comparing offers, consider all the loan terms. The interest rate is certainly important, but other loan fees and costs, such as late payment penalties, should factor in to your ultimate decision. Pay special attention to fees you think you’re likely to incur.
Once you’ve found the financing deal with most favorable terms that you can afford, double check your budget one last time to confirm you can easily make the payments. Add the car payment shown on your offer into your monthly figures and try living on that new budget for a short period of time, such as a week or two, before signing the final agreement.