Auto Financing: Choosing What’s Right for You

The process of applying for an auto financing option is now easier than ever. With accessible information, streamlined processes, lower rates, and better financing schemes, consumers today have more choices than ever. Customers of dealerships are more capable of making more intelligent decisions when choosing the right car for them. However, things may become a bit trickier when selecting the best loan for them.

What is Auto Financing?

Car financing or a car loan helps the consumer to cover the entire cost. It is different from personal loans. With an auto financing loan, the vehicle will serve as collateral. The lender can seize your car the moment you default on your payment. It can be a bit similar to a mortgage; the lender still has the ownership of the asset until you completed the payment.

What Are Some of the Popular Auto Financing Options?

Before you go to the market, you need to know which option is best for you. Each option offers advantages and drawbacks that will help you determine which suits you the best. Be sure to consider each factor, such as your unique situation and needs, before choosing the best auto financing option.

• Credit Card- If you have a high credit limit, it is always possible to purchase a car using your card. Unfortunately, not all dealers will offer this convenience. Those who accept this payment scheme will impose specific charges before giving you the go-signal.

• Car Dealership Loans- This is another popular option that you can acquire from car dealers. It helps their customers to qualify for a more expensive vehicle. Some people will find this a better option since dealers are usually connected with several lenders. Therefore, the approval process is a lot faster. However, it is always essential to research the dealership first before choosing your option. Some dealers will be charging their customers a higher annual rate and interest. Be aware of the terms and rates that they are imposing.

• Home Equity- If you own a house, home equity is offered by some auto financing companies. With this option, you can borrow money by putting your home as equity. It means that the lender would get to keep your house if you failed to settle your debt.

• Car Lease- In this situation, your lender will choose the vehicle for you. They will then lease the car to you for a specific period. You will be responsible for paying the monthly charges. You will also be accountable for all the repairs and maintenance of the car during the time of lease. After the lease period, you will have different options; you can purchase the vehicle from the lender by settling the remaining cost, refinance the car, or return the vehicle.

• Bank Loans- Banks are perhaps the most accessible alternative for you. One of the benefits is that the bank loan will come with a lower interest rate. There may be some variation, but the rate is always competitive. However, the process of application will be stricter such as a good credit score.

What Are Some Factors to Consider When Choosing a Car Loan?

 When choosing the best car loan for you, there are simple terms that you need to consider guaranteeing that you are getting the best value for your money. Moreover, it would be best to use an auto financing calculator to check the total interest you need to pay, monthly and principal payments.

• Interest Rate- Since the lender will have complete control over the vehicle, the debt that you will make comes with a lower risk. This option will often translate to a dramatically lower interest rate on the part of the borrower. Also, it is a fixed interest, so they will not subject you to any unplanned increase, which will often happen to unsecured loans. When choosing the best auto financing option, remember that the lower the interest rate, the better. Be sure that you will be able to handle the total cost of the car plus its interest rate.

• Length of Loan- Consider your loan as a long-term investment. You will be responsible for paying the loan, even if you don’t own the car, during the whole payment process. While some people may opt for a low monthly payment scheme, the loan length will be almost ten years. Sometimes, this can result in paying a higher interest rate than usual.

• Choose the Financing Option that You Can Afford- Choose an auto financing option that you can quickly pay. Choosing a loan that comes with a payment scheme beyond what you can afford can put you in a dire situation. Your credit score will be affected, and your car has a high chance of being repossessed.

What to Do Before Applying for a Car Loan

Another way to ensure that you are getting the best loan from the auto financing companies is to take the necessary steps to improve your finance. With this, you will be in a better position to negotiate.

Improve Your Credit Score

Before you go to the market and hunt for a lender, you first need to be familiar with your credit rating. Most lenders will use your credit score to determine if you qualify for your financing option or not. It also plays a vital role in managing the interest rate. The higher your credit score is, the lower the rate will be. There are various ways to determine your score; you can even request the bank to send you a monthly copy. You can also access a more detailed report using different credit bureaus like Equifax or Experian. Usually, it would be best if you had a score beyond 600 to qualify for the loan, and a score beyond 700 will offer you the best rates.

Research!

With an online database such as Auto Sales Reviews, it is now easier to research your options. It would be easy to look for a dealership that offers the auto financing option that suits you. You can also look for any penalties that come with the loan, required upfront payment, repayment terms, and interest rates. These are necessary to check if you are dealing with a trustworthy lender.

Limit Your Shopping

Know that whenever you apply for a loan, the effect will translate to your credit score. Therefore, it will be more difficult for you to qualify for a premium rate loan. It would be best to limit your loan shopping to around two weeks. With this, your application would only indicate a single inquiry. Restricting your shopping for a specific period will reduce any detrimental impact on your credit rating.

Compare Your Auto Financing Options!

By now, you probably have a few options in your hand. It would help to narrow down your choices to determine the best auto financing loan for you. Reach out to some of these companies and ask for their quotes. Understand that the lowest APR (Annual Percentage Rate) that they are advertising on their website may not necessarily be the one you will receive. By asking for their quote, you are arming yourself with the actual offer of these companies. Once you receive the quotes, pay close attention to the repayment terms and APR. As we mentioned above, even if they are giving you a more affordable monthly payment, it could be a longer loan, resulting in higher interest.

How to Ensure that it Will Fit Your Budget?

If you want this car purchase to be less stressful, you need to make sure that you have the fund to pay for it in the most reasonable way. Unless you have a vast amount of money in your savings account, there’s a good chance that you need to take a loan to cover the cost. Nonetheless, you have to ensure that you can afford the payment of the loan terms.

How Do You Set a Specific Budget?

You need to know how much you can afford. Some salespeople will tell you that a car will be more affordable if you opt for a long-term auto financing option. However, that is not always the case. Most of the time, it may force you to overspend. To identify that you can handle the car loan, be sure to pay attention to these terms that you will encounter.

• Down Payment- This is the upfront payment that you must make when purchasing a car. Generally, the bigger your down payment is, the lower the monthly payment will be. You should be ready to make a down payment of at least 20% of the total purchase to secure the best auto financing option. You will enjoy flexibility, better terms, and you will be in a better position to negotiate. Also, consider a trade-in since the credit may help cover the down payment.

• Monthly Payment-The regular payment that you will have to make within the agreed year. Be sure that you will not find the monthly cost cumbersome. You should still have enough cash to handle any unexpected events.

• Loan Terms- The period that you will need to pay for the loan.

• APR- Annual interest rate that you will need to settle.

Be Aware of These Sales Tactics

Another way to ensure that you are making a better decision on choosing your auto financing companies is to be aware of the common tactics that the salespeople will do to lure you in applying for their car loan.

• Car Features- It is pretty standard for these lenders to entice you using features that can allegedly add to the car’s maneuverability, comfort, and convenience. However, if you already have a specific budget in your mind, you should let go of the features that you can’t afford, or you don’t necessarily need.

• Small Down Payment- A lender offering a lower down payment is a common tactic in this field. They will tell you that it will make the price more manageable. However, this also means that you will be borrowing a higher amount. Always choose a car you can afford realistically. Never take a loan that can put your finances in a terrible situation.

• Payment Misdirection- Some people will look at the monthly payment when considering their budget. Some lenders will take advantage of you if you do this. As aforementioned, you should always look at the total cost of the car. It includes the purchase price, the interest rate and the fees for penalties.

Skip the Unnecessary Insurance?

It is common for lenders to add different kinds of insurance to your auto loans. If you are searching for the best auto financing option, you should skip the extra coverage or shop for it elsewhere.

• Collision Insurance- Some lenders may force you to get their collision insurance, which will help you cover the repair cost if you are at fault for the vehicular accident. Should you stop making the payments, they can quickly repossess your car. You can shop for it on your own, and it will usually be more affordable.

• Credit Insurance- If the lender is asking you if you are carrying a disability or life insurance, there is a possibility that they are selling credit insurance. It should be optional; it is meant to protect your property and payments if you lose your job or become ill or injured.

• Liability Insurance- It is always better to shop for liability insurance yourself. You will always end up paying less than if you choose to acquire it together with your auto financing option.

When shopping for an auto financing option that is right for you, it is always better to arm yourself with the basic knowledge. Be sure that you will make it a habit to read the fine print before affixing your signature into anything. Once you enter the dealership, always stick to what is realistic. It will be your defense against the shiny cars and the tempting deals that you couldn’t afford.