It’s time for a new car. You probably ran through the decision to repair the car you have or buy a new car.
Buying a new car is a big commitment, only behind the financial commitment of buying a home. How to pay for a car? With a home, you get a mortgage or a home loan to finance that purchase. With a car, there are several ways to pay for it.
About 107 million Americans have an auto loan and 6 million are behind on their payments. Find out how you can finance your car purchase and make your monthly payments.
What Can You (Realistically) Afford?
You need to have a straight up talk between yourself and anyone else involved in making the buying decision. Take a close look at your finances and figure out how much you can spend on your down payment and on monthly payments.
You’ll also need to consider insurance, gas, and maintenance with your car costs.
You may have Ferrari tastes, only to find out that you’re on a Kia budget.
You can use this information to start shopping for cars. You might be taken by the Volvo remote starter and want a Volvo. You should have a few models in mind before you head to the dealership. They’re likely to try to upsell you to a newer model. Having an idea in mind as to what you want to buy keeps you from getting sold. You’ll also stick with your budget.
How to Pay for a Car
There are a few ways to pay for your car. The first is paying all cash. This is an unlikely scenario since many Americans have very little savings. That means that you’ll turn to financing the car. These are the common places to go to when you’re exploring how to pay for a car.
The dealership that you’re buying the car from is likely to offer a financing program. That’s convenient, but it may not be your best option. Dealers will take your financial information and send that to the lender that they use.
That lender will come back with an offer. It will have the loan amount, the interest rate, the terms, and the monthly payment. Dealers are likely to add a little bit to the interest rate, so they get a cut of the action, too.
Personal or Auto Loans
You can shop outside the dealership for your loan. Banks and online lenders offer personal loans and auto loans. Are you wondering what the difference is between an auto loan and a personal loan?
With an auto loan, it’s used for the specific purpose of financing a car. A personal loan can be used for anything, including buying a car. Both are considered installment loans, which combine the principal and interest into one monthly payment. You pay the same amount every month for the life of the loan.
Bonsai Finance has a guide to help you find personal loans online.
Check Your Credit Report
When you finance your car, the total amount of the loan will depend largely on your credit score. You want to check this before you start shopping for a loan so you know what to expect from lenders.
When you have good credit, you’re considered to be ‘creditworthy,’ or a low credit risk to banks and lenders. You’re more likely to pay your loan back on time, so you’ll get a lower interest rate from lenders.
With a fair to poor credit score, lenders will think that you’re a credit risk. There are lenders who will lend to you with a low credit score. You want to make sure that you’re not paying too much for the total cost of the loan.
You can have a loan that is $19,000 for 5 years. The interest rate is at 8%, making your monthly payments $385.
With a 5% interest rate, your monthly payment is $359. You’re also paying $1,600 less for the loan in interest. That’s how much your credit score can impact the loan.
Lower Your Credit Score
Are you likely to get a higher interest rate for your loan because you have a lower credit score? There are steps that you can take to raise your credit score.
The first thing you can do is to make sure that there aren’t mistakes on your credit report. If there are, report them to the credit reporting agencies to get them removed.
There are a few factors that go into your credit score. Your credit utilization score and payment history are the two main things that are considered.
There’s not much you can do about your payment history except pay your bills on time and give it enough time for those to have a small impact.
The second thing you can do is pay down the amount of debt that you have. If you have two credit cards that are both maxed out, you’ll want to pay those down as much as possible. That will give you a better credit utilization ratio and bring up your credit score.
Did you know that the simple act of getting preapproved for a loan can give you power at the dealership? A preapproval letter from a lender is just a good as walking in with cash in the eyes of the dealer.
That’s because they know that they’re going to get paid for the vehicle. The advantage for you us that you have a bit more negotiating power than not having a pre-approved letter.
Financing Your Car Purchase
Buying a new car can be a lot of fun. It’s like getting a new, expensive, shiny toy.
The real question is how to pay for a car. Financing a car can be stressful, but it doesn’t have to be with a little planning. You just need to assess your financial situation, check and improve your credit score, and find a lender for your needs.
Ready to start shopping for a car? Check out this review of the Ford Escape Ti Sport.