Car Financing: What You Need To Know

Chances are high that you’ve at least heard of the word ”financing” before. But do you really know what this entails and what things you should look out for? Below, I’ve outlined a few key things you should keep in mind next time you consider financing a vehicle.

What is Financing?

In layman's terms, financing a car simply means you will be taking out a loan from either a creditor or lending institution to complete the purchase of your new car. Once your loan is paid off, usually in 5-6 years depending on your loan term, then you will outright own your car. This can be an enticing option for people who are looking to own the same car for awhile, don’t want to worry about yearly mileage on their car, and can afford to pay a downpayment. The alternative to this would be leasing your vehicle, which you can learn more about here.

Know Your Credit Score

While there is no set score you should have when you apply for a car loan, there are scores you’ll want to aim for. A 2016 Experian report found that average scores for borrowers are 711 for new-car loans and 654 for a used-car loan. This doesn’t mean that if you have a score far below 656 you won’t get approved, but you are likely to pay higher interest rates than someone with a much higher score. If you are thinking about taking out a new or used car loan, work on improving your credit before you go to the dealership.

Get Multiple Quotes Before You Go

You have a lot of options when it comes to choosing which company to finance your auto loan through. One idea is to check with your bank to see if they offer auto loans. Sometimes you can get the lowest rates and best terms from them because you already have an established history. But, keep in mind that just because you are offered a certain rate on your car loan from your personal bank, doesn’t mean another lender won’t offer you a better deal. It is always smart to check with multiple lenders before you make a final decision. When you choose to take out a loan through your auto dealer, he or she will oftentimes submit your information to multiple lenders in an effort to find you the lowest interest rate as well. There is no wrong way to take out a car loan, but it is smart to check with multiple sources so you are making sure you get the best deal. Afterall, you’re only saving yourself money in the long run!

Pay For Taxes, Fees, and Extras With Cash

The sticker price you see on a car is not usually the full price you will end up paying after everything is said and done. You should expect a thousand or so extra dollars to be spent on the taxes, title, registration, and any “extras” you want to add onto your vehicle. While some auto lenders will allow you to roll in those fees into your auto loan, we would advise you think twice about doing this. Think about it this way, even if a car were to keep its full value when you take ownership of it, since you are financing the sales tax, you’re already upside down. Plus, you will now have to start paying interest on tax, which makes little sense if you really think about it.

Deciding to purchase a new or used vehicle is a big decision, but it’s usually necessary unless you live within walking or biking distance to everything you need. Considering the above things when you are deciding whether or not to finance your next vehicle will help you make a more informed decision.

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