Saturday, June 8, 2013

4 Things You Should Consider Before Financing a Car

Good auto financing options differ from person to person. Not only do these options depend on your own financial situation and credit score, but they also are determined by the age of the car that you're looking to finance and the financial institution itself. Before you buy your next car, consider how these factors will impact your financing.

How Much Can You Afford to Pay Each Month?

Financing a car means you'll have monthly payments. Make sure you choose a car and financing option that fits into your budget. Do you think you can afford $500 a month, or is $300 closer to your range? The amount that you can afford will influence the kind of car that you buy, but almost anyone can find an affordable option. Also, keep in mind that most financial institutions won't grant an auto loan for less than $5000. 

How Large is Your Down Payment?

The more you can spend on a down payment now, the less money you have to borrow to purchase the car. That means paying more now could equal smaller monthly payments, which can come in handy during rough times.

Most lenders and finance offices will also give you better interest rates when you put down a significant amount of money. Someone with a $1,000 down payment might pay five percent interest. With a $5,000 down payment, that same person might pay closer to four percent. That single percentage point can add up to big savings over a few years.

Lower interest is attractive, but you shouldn't spend your entire savings on a down payment. What would you do if you lost your job or had unexpected expenses that made it difficult for you to repay the loan? A couple thousand dollars in savings could get you out of a difficult situation.

How Healthy is Your Credit?

Your credit rating will have a big impact on your finance options, so you should get a copy of your credit report before you start looking for a new car. If you have excellent credit, then you can expect lenders and dealerships to give you lower interest rates. That excellent score makes you an attractive customer, so they're willing to give you competitive rates.

If you have mediocre or bad credit, then you can expect to pay higher interest rates. That doesn't mean it's impossible to get financing. You can still get a bad credit auto loan, but it will cost a little more. 

How Long Will You Keep the Car?

Most people forget to think about how long they actually want their cars, but that's an important consideration when you plan to finance the vehicle. If you plan to drive the car for ten years, then you can probably live with a four-year loan. Then you'll have six years of payment-free driving.

If you only plan to drive the car for a couple years, though, you don't want a four-year loan. Then you'll have to worry about repaying the loan's balance before selling it for a new vehicle. Instead, you'll want to choose a shorter-term lease that helps you pay for the car quickly.

What other things do you think people should consider before financing a car? Have you ever found out too late that you made a mistake when getting a loan?

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