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Seven Smart Ways to Finance a Car
●January 11, 2021●5 minute read
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Cars depreciate fast, so you’ll agree that paying the total purchase price for a car at once is probably your best bet. This prevents you from repaying loans long term with interest after the car’s value has really gone down. However, the reality is that a lot of people can’t afford to pay the full price of a vehicle upfront, which is where car finance comes in. It’s smart to have a budget and do intensive research on the best finance options that suit your needs. Here are seven smart ways to finance a car;
1. Understand and review your credit score
The first step you need to take before filing loan applications is to get and review your credit history. The credit bureau offers a free copy of this once in a year, so all you have to do is a request for your report and go through your credit history.
Why is this step important? Your credit history provides information that can help the lender grade your trustworthiness. A high credit score boosts your chances of getting your loan application approved while a low credit score most likely means that your application will be denied. A high credit score also gives you negotiating grounds to get better rates from your lender. People with a low credit score will most likely pay really high-interest rates if they get a loan at all.
Your credit report contains your history of credit payments. It shows if you have been making due bill or loan payments or if you’re a habitual defaulter. More points will be deducted with more late payments. Lenders can’t trust you if your credit history reflects that you do not pay bills on time. Understandably so, yeah? Your credit report also shows the amount you owe compared to the credit you have. The age of your accounts shows stability or inconsistency, and lenders do take note of this.
2. Build your credit score if you have no credit
Bad credit history is not the end of the road as you can take a timeout to build this up. It’s also possible that you do not have a credit history. Luckily, they’re a number of ways available to build this. You can get a secured credit card or credit-builder loan. Make sure the payments on your secured credit card are reported directly to the credit office. Monitor your progress by taking the time to review your credit report. The credit report is also not error-proof so you need to cross-check for any errors that can be corrected before presenting to your lender.
3. Keep your loan term short
It can be really tempting to stretch out your loan term, but don’t do it! Keep your loan term as short as possible if you can afford it. Why is it important to do this? Most times when you work into a dealership for dealer’s finance, they try to attract you with small monthly repayments stretched over a long time. This might seem like a good idea at first glance, but I’m sure you’ll also notice that you’ll be paying more interests over a longer loan term. You’ll also be paying more for a car that would have really depreciated in value. It’s best to keep your loan terms between three to four years if you can.
Another issue with long loan terms is car repairs. Most new cars come with a warranty that lets you have free repairs and servicing. A short loan term means you can pay off your loan within the warranty years while saving cost on repairs and servicing. However, with a long loan term, your warranty will most likely expire along the line and you’ll have to meet up with monthly loan repayments, scheduled servicing and repairs at the same time.
A short loan term means higher monthly repayments but fewer payments on interest over time. Some banks also offer lower interest rates on short loan term agreements. A short loan term also means you’re getting out of debt earlier, and you can quickly budget your finances towards that.
4. Save up for a substantial initial deposit
You have higher chances of getting loan approval if you already have enough saved up as an initial deposit. An initial deposit is a percentage of the total purchase price paid at the beginning of the loan term. Lenders generally require you to pay at least 10% of the purchase price as initial deposit, depending on the lender. People with good credit are sometimes offered no deposit car loans and do not have to pay any amount at first, but this is rarely the case.
It is advisable to have at least 20% of your purchase price saved up as an initial deposit. This is important for a number of reasons. First, it reduces the amount you have to pay monthly and can also mean a shorter loan term. You’re also more likely to get approved for a loan with good interest rates if you have a substantial deposit. Your chances of having negative equity are also lessened. You’ll need to properly budget for this and it’s advisable to take time out to save if you do not have enough as down payment yet.
5. Understand taxes and fees
Try not to be easily swayed by the attractive rates. Before signing a deal, consider the full term of the contract and ask for a breakdown of every extra fee and tax you’ll be required to pay. Question those you perceive as irrelevant. After figuring out what you have to pay in taxes and fees, it’s advisable to pay it upfront in cash. This might eat into the down payment you have saved up, so try to get an estimate of this to know the amount you’ll have to save up as a down payment.
6. Set up a budget
It’s important to have an estimate of the amount you can spend compared to your income. You need to pick a car within your financial range and readjust your monthly budget to fit in the loan repayments to prevent future financial difficulties and possible car repossession.
7. Research and shop around for the best deals
If you’re trying to shop for a new pair of shoes online, you probably won’t stop at the first online store you see. We assume that you’ll surf different sites for price and reviews to find the best deals. Getting a car loan is even more vital and more time should be taking researching and reviewing the best rates for you. Consider using a car loan broker if it gets too overwhelming.
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Written by Jacaranda Team