The average price of a new car is about $40,000.
At the same time, you need a car. Unless you’re one of the lucky ones who lives in a walkable area, you need a car to get to work, pick up groceries, and run errands.
Getting the right car is a big challenge. Financing that purchase is even more difficult. It can be as challenging as getting a home loan.
Do you want to know how to finance a car? Buckle up, because we’ve got you covered. Read on to find out what it takes to get the right car loan for your financial situation.
Set Your Car Budget
A lot of people get buying a car backward. They start car shopping, find a car they like, and then try to fit the car into their budget.
What often happens is that they have too much car on their hands. They wind up in a bad financial situation because they struggle to make payments or they owe more than the value of the car.
Let’s flip the script on the car buying process by starting with your budget. This is the part where you figure out how much car you can realistically afford.
You need to take into consideration a number of things besides the monthly payment on your car. You’ll have to pay for insurance. There are maintenance and inspection fees that you have to pay somewhat regularly.
There are also taxes, fees, and registration costs when you first purchase the car. All of these things have to be taken into account when you come up with your car budget.
Lease vs. New vs. Used
You need to have a general idea of the type of car you want and can afford. You may want to get a new car, but the cost could be out of your reach, even with a car loan.
You could lease a new car or get a used car. There are advantages and disadvantages to each option.
A new car is the most expensive option, but it comes with the most peace of mind. You know that you’re driving off the lot in something that won’t break down in two weeks. Plus, new cars tend to last longer now than they have in the past.
If you keep up with maintenance and drive an average number of miles each year, it can last anywhere from 8-12 years.
The disadvantage of a new car is that it costs more to insure. You’ll also lose a significant percentage of the value of the car in the first few years of ownership in depreciation.
You can lease the car, which will lower the monthly payments of the car. Think twice about this option if you drive a lot of miles.
Leases have limits as to how much you can drive the car. Go over that amount and you will pay a fee at the end of your lease.
There are usually added insurance fees on top of the lease. This makes the monthly payments a bit more than you expect.
A used car is the cheapest option, but you have to do the legwork to make sure you get the right car.
Once you know the route you take, do some research to figure out the type of car you want. You can have some makes and models in the back of your mind.
Check Your Credit Score
At this point, you have an idea as to how much you can spend on a car and the type of car. You want to make sure that you’ll get approved for financing.
Check your credit score. A score of 700 or above gives you the best chance of getting a loan with a low interest rate.
A lower score will make things difficult for you. You should expect to pay a higher interest rate for your car loan.
Save for a Down Payment
What can a down payment do for your car purchase? It lowers the amount you need to borrow. That’s helpful because most car loans are for 70 months.
You can lower the length of the loan by a year or more. That gives you more time with a car and not have to worry about monthly payments.
This is a good strategy if you have a bad credit score. That’s because you’re taking on more risk than the bank. That will improve your chances of getting a better car loan.
Do you have a car to trade-in? That can help you bring down the amount of money you’ll need to purchase the car.
You can expect to see car dealers give you less money for a trade-in than what you can get selling it privately.
Look at All Financing Options
There are dozens of ways to finance your car purchase. You can go through a traditional lender or use a car dealership. You can find car loans online.
There are some credit card companies that offer low-interest car loans to their best customers.
At this stage, you want to get prequalified to compare your best options.
You have to look past a low monthly payment when you compare car loans. Car loan repayments have terms that you need to be aware of.
For instance, you could have a low monthly payment of $170 a month. That loan could be for 84 months with an 8% interest rate. You’ll be stuck with that payment for seven years.
Look at the monthly payment, interest rate, length of the loan, and fees on top of the loan. These items give you the best sense of whether a loan is right for you or not.
Increase Your Credit Score
If time is on your side, you should use it to increase your credit score. This step gives you a long-term advantage because you’ll pay less interest over the life of the loan.
Take a close look at your credit report and look for any unusual items. These could be errors on the credit report that need to be corrected.
If you have negative marks on your credit report, you can work to get them removed. You may have had a bad time financially.
Those late or missed payments still might be on your credit report. If you’ve had a clean track record of on-time payments since then, the bank might work with you to remove those negative marks.
Your credit utilization rate shows lenders how well you handle credit. If your credit cards are maxed out, it looks like you are in financial trouble. You generally want to keep a ratio of 30% credit used versus credit available.
You can lower this ratio by paying off your credit cards quickly. You can get a credit increase, which will give you more credit available and lower the ratio.
You’ll want to get preapproved for a car loan before you walk into a dealership. A preapproval letter is almost as good as walking into a dealership with a suitcase full of cash.
Car salespeople know that you’re serious and ready to buy. They’ll be willing to work with you to find the right car at the right price.
You’ll need to go through a formal application process with a lender. You only want to get preapproved once, so make sure you did your research before applying.
Shop Around for Cars
At this point, you have a few car models and a price range in mind. Now it’s time to visit dealerships for cars.
About 41% of car buyers visit one dealership to buy a car. That’s because they do most of their shopping online and visit the dealer to close the deal.
You should visit a few dealerships to test drive cars. This gives you a better understanding of the car and you can choose the dealership.
Don’t be afraid to walk away from a deal, either. You can and should negotiate with the dealership to come up with a fair price.
Since you’re already preapproved for a car loan, you have negotiating power on your side.
How to Finance a Car: Just Follow These Steps
How to finance a car isn’t as straightforward as it seems. You need to take a lot of steps to put yourself in the best position to get a good car loan.
If you follow the steps laid out in this article, you’ll be in a great position to get a reliable car. You won’t have to worry about how you’re going to afford the payments each month, either.
You’ll have security and peace of mind as you enjoy your new ride. Be sure to come back to this site often for the latest news and helpful lifestyle tips.