Car Financing 101: How to Pay for a Car - Motor Era
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Car Financing 101: How to Pay for a Car
August 1, 2019 Motor Era Comments Off on Car Financing 101: How to Pay for a Car
Car buying in America today isn’t nearly what it used to be: the average price for a new car last year was a record $37,577.
Needless to say, sticker shock is commonplace for a new car buyer these days.
So, with car prices jacked to the moon, how does one pay for a car today? Who do you go to? When is the best time to buy? What is a good rate for you and the car you want?
Fear not, for we have the answers!
Here, find out everything you need to know about how to pay for a car.
How to Pay For A Car – The Basics
The most obvious and likely unhelpful answer to someone is to “just pay for it”, referring casually to what we call a cash sale.
Whether or not you pay with cash really isn’t the point, just that you pay for the vehicle 100% without any kind of financing or payment plan.
When it comes to paying with cash, it is important to remember the power that comes with it. Dealers often relish the opportunity to make a cash sale due to the immediate payday associated with it. A dealer is often quite flexible on that high sticker price when you start waving the Benjamins in front of them, so feel free to haggle a bit when you have the luxury of paying cash for a car.
While simply buying a car with cash would be super easy and simple for a prospective car buyer, it just isn’t feasible for those of us who don’t make the big bucks.
There are several options for financing at this point, depending on many factors such as the vehicle you have chosen, your credit history, and your income, among other things.
When it becomes clear that you cannot pay for a vehicle outright, the next logical step is to explore financing possibilities.
Worry not, it’s quite simple when you break down the various options and factors that go along with obtaining a car loan.
But before we get into more about obtaining a car loan, a good first step is determining exactly what your budget is.
What does this mean? Well, it means that you need to make sure you choose a car that is within your means. The higher the price of the vehicle, and therefore the loan, the higher your monthly payment will be.
While it isn’t an exact figure of your monthly payment, taking the price of the vehicle and dividing it out over 5 or 7 years can give you a rough idea of what your monthly payment will look like, minus any down payment you make of course.
And speaking of down payment, that brings us to the next step, determining your down payment.
What is a down payment anyways?
A down payment is an amount you put down initially on a car, while your loan provider covers the rest while you make payments, with interest, to them.
Obtaining a loan without a down payment is essentially impossible, as almost every lender will require a down payment of some form.
Figuring out how much you can put down can help you before you even start looking for a car because many lenders require about 10% of the purchase price of the car for any loan.
So, if you bought a $30,000 vehicle, you would likely need at least $3,000 to put down upfront towards it.
After settling on the car you can afford in terms of both monthly payments and down payment, we move into the nitty-gritty of financing, starting with checking your credit.
You may be wondering, “Why would I check my credit? Don’t the lenders do that?”
The answer is yes, they absolutely do.
However, you need to know your credit strength going in so that you don’t get steamrolled when it comes to your interest rate.
Now that you’ve got your car picked out, your payment ability determined, and your credit score checked, it’s time to find yourself a lender.
But who is a lender exactly, and how do I know which one to go to?
In the most general sense, a lender is just that: someone who will lend you money in exchange for repayment, plus interest.
Lenders can include the car dealership itself, a bank, credit unions, and online car loan companies.
Which one is the best? Like many things in life, it depends.
One thing for certain is to see which ones will finance you at all. If you have good credit, this likely will not be an issue. If your credit is poor, you may find yourself denied everywhere.
While credit is a major factor in any lending decision, your income and desired monthly payment will also play into whether or not you will be approved.
What do you do in this situation? Well, if you cannot obtain credit on your own for an auto loan, you may consider looking into finding a co-signer to the loan.
Those with high credit scores may be able to obtain great rates through banks or credit unions.
If you have average credit, you may be able to find a bank loan still, albeit at a higher interest rate. Or, you may be able to get a loan through the dealership directly, also known as buy here pay here. Online loan companies are an option as well.
Those who have poor credit may struggle to find a loan on their own at all. It is unlikely that a bank will take on your loan. The best bets are to try buy here pay here options or online loan companies.
While there are many, many guidelines and advice out there about how high of an interest rate to take, it truly comes down to the individual. If you are comfortable paying a high rate to get into a sweet set of wheels, that is perfectly fine.
But, just to make sure you aren’t getting taken to the dry cleaners by the lender, do some research! Look up what kind of interest rate your credit score should get you.
Remember, interest rates are negotiable, so never let someone tell you they can’t do anything about your interest rate.
Get the Knowledge to Treat Your Car Right
While figuring out how to pay for a car may seem daunting, it isn’t all that scary.
Once you find an interest rate with a lender that is acceptable for you, they will typically take it from there in terms of the paperwork and documentation of the loan.
Finally, make sure you read over every document you sign!
But, once you get yourself a ride, where will you go to learn how to fix your car or find a manual for it?
Look no further! Our blog is your online place for all things car repair and maintenance.
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