What to Consider When Financing a Car

Sometimes, the excitement of owning a new ride overshadows due diligence, and some people make costly mistakes that push them deeper into debt. 

If you can buy the car without an auto loan, good for you. It’ll save you from bad credit auto loans.

Most people get a loan to purchase a vehicle, which seems like an easy process. However, observe due diligence and focus on auto insurance, extended warranty, and things like sales tax—anything to keep your costs down. 

But the elephant in the room is auto loans. Your choice of financing can determine whether your financial health gets a beating or improves, and so the vehicle loan should be scrutinized as well as you do the various features you want in the vehicle, if not better. 

Before you fill out the credit information, look out for the factors we list as some of the most important.

Your Credit Score

The single most vital factor when looking for car financing is your credit score, as it determines:

  • The amount of loan you qualify
  • Interest rate
  • Monthly payment and 
  • Whether you get the auto loan or not

While the scoring system used to determine eligibility for the financing varies between providers, you can still determine your score. Look at your credit history and determine if it’ll help you get the most amount at the best rate. 

To keep the credit score healthy (if it already is), limit the financing application to 14 days. But why is this?

Multiple hits within two weeks count as one and do not negatively affect your credit score. You see, the credit score changes based on the credit-related activity it is getting and the credit history. 

Relationship With the Financier 

An established financing offer in tow when walking into the dealership is vital as it guarantees you’ll have the loan to cover the costs of your new ride. This ensures you don’t miss out when the competition for the vehicle is stiff. Buyers who walk into dealerships with already secured loans are hard to resist and are often in control of the negotiations. 

A finalized auto financing gives you peace of mind to focus on negotiating the price of the car you desire. That means planning and shopping for the loan before you step foot in the dealership.

If your credit score is good, you can negotiate for anything from the financing amount, the rate, and the monthly payments. You can also get a juicier deal from a financier when you create a relationship with them, and you can later go back for other financing products such as auto repairs

The Cost of the Financing 

Before signing for financing, you must know how much you’ll be paying back. What are the monthly payments, the interest rate, and the total amount you’ll pay back? 

The APR may not affect the monthly payments much, but there are other costs such as sales tax. Determine the dealer’s fees and others, such as extra features, and if the cost is beyond your budget, have the grace to say no. An afternoon running the numbers can save you from years of payments. 

Some dealerships will offer better rates, so you should check them out. In addition, compare the rates between traditional banks, credit unions, and online banks. 

Is Dealer Financing a Better Option? 

Dealer financing may be the most accessible and attractive. After all, it is from where you’ll drive off with your dream car, saving you from so much activity. 

Dealerships will use terms such as 0% financing, which seems like a good deal but crunch the numbers first. What makes it possible to get the best deal? The interest rates may be low, but the cost of the vehicle may be on the higher side. It’s sometimes a game of balancing the scales to earn the most profit. 

Don’t be too quick to accept the initial financing option dished to you, especially after showing the salesperson how much you love the vehicle. Many people don’t realize that the dealership is within their right to jack up the interest rate, regardless of the credit score. You may qualify for 6%, but the dealership will not tell you. Instead, they convince you to accept 8%, which costs you thousands of dollars in the long run. 

Getting pre-approved for a motor vehicle loan gives you the aces in the negotiation game. For example, you approach the dealership with a pre-approval at the rate of 5%, but the dealer tells you, “Hey, here’s a better deal at 4.5%.” There’s no reason you shouldn’t take the better deal, but make sure the length of the loan and down payment remains the same. 

Penalties and Fees 

Find out if the financing has any penalties and fees. Some auto loans charge prepayment penalties when you pay off the loan before the end of the term. 

The processing fee will also vary between auto loans. This can be a percentage of the loan or a flat fee. Ask if there are other charges added to the loan. 

The Length of the Loan

The loan length is one factor that potential car buyers tend to overlook and will be quick to sign on to six or seven-car loans. While the installments are lower for the seven-year loan than the five years, the interests are higher. In the long run, you pay so much interest that it impacts your financial health. 

If you decide you need a car with a bigger seating capacity to accommodate a new family member, you may dispose of it while still paying for it. The longer-term loans risk your financial health significantly, so it may take some time to recover.

Filling the garage with a brand-new car shouldn’t cost you an arm and a leg. Car financing is not complicated if you are ready to do the math and ask hard questions. Don’t be carried away by the vehicle’s attractive features and, in the process, forget that you have other bills and responsibilities to fulfill. Take due diligence when choosing a car loan. 

Forty-something years later, Chad still doesn't' know what he wants to do if he grows up. Raised around cars and trained in diesel mechanics, Chad has owned a successful detail shop, developed and sold software, led a K-9 SAR team, ridden the dot-com wave as a marketing & PR executive, led digital strategy teams at both large and small agencies, and now this. He digs Jeeps, off-road racing, football, photography, writing, making EDM, cranking metal, PC gaming, and a plethora of other contradictory things.

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