Thinking about buying your first car?
For many, this is a dream come true. So it’s natural to be excited about the thought of the freedom and independence you will soon be getting. It should be a joyous occasion- you’re moving forward in your life. 🙂
To make sure the process is as stress-free as possible, let’s take it from the top.
Before you begin
Buying a car is expensive. So before you start your car-buying journey, here are a few things you need to have sorted out.
1. Do you have enough cash?
You need to identify your budget, even before you begin searching for a vehicle. If you don’t have enough money, you will need to consider other options, such as leasing or getting a loan.
2. Know your credit score
Your credit score will determine your financing options. A high score will make it easier to acquire a loan as well as getting a better interest rate. A score above 670 is usually considered to be suitable by most lenders. If you have a reduced range, work on improving your score before applying for an auto loan, or consider asking a cosigner to sign with you.
3. New or old?
You need to decide if you can buy a new or used automobile.
For those with a limited budget, purchasing a pre-owned one is the best solution. And since the value of an automobile typically depreciates the most in the first year of its life, you can get a used car for a fraction of its new-car price. However, it will require a little more work. With a quick background check and a visit to a trusted mechanic, you may find the perfect one.
But for anyone who wants a vehicle with guaranteed performance, consider buying a brand new automobile.
Don’t have sufficient money?
There’s no need to stress out. The good news is that you can still buy your car, even if you do not have adequate funds. Ideally, get preapproved with a lender before starting your hunt. You’ll have 30 to 90 days to shop around. Additionally, you can use the quote to negotiate a better deal.
So, I guess it’s time to start shopping.
Where should I go for financing?
Depending on the car you are planning to buy, your financial situation, your needs, and your credit history, there are several auto financing alternatives. Usually, the first place that comes to mind when thinking about loans is the bank. But credit unions, online lenders, and car dealerships are just as good.
Acquiring loans from credit unions comes with membership benefits. They generally offer lower interest rates than banks, are often more supportive of those that have a poor credit rating. Plus, they provide a more personalized experience.
With online lenders, shopping around and comparing loan rates and terms is much easier. Moreover, they are more willing to work with borrowers with less-than-perfect credit. While these candidates might offer steep interest rates, those with good credit could be offered an interest rate is lower than that of a traditional bank. But it’s always advisable to research the reputation and read the reviews of an online lender before signing any papers.
As for the dealership financing option, we will talk about this in more detail later on in the blog.
What type of car loans are there?
The following are some types of loans that you should look into:
1. New car loan
A new car loan applies to a vehicle that is brand new or just a couple years old. The lender determines how old a car can be, but it is usually within 3 years. Though a new vehicle is pricier, their loan rates are lower than that of used ones. And it’s ubiquitous for the loan to be secured by the value of the automobile.
2. Used car loan
This loan applies to cars that do not qualify for new car loans but are not more than 5-6 years old. These typically have higher interest rates.
3. Secured car loans
Often auto loans are secured by the car that’s being purchased. But other assets besides the vehicle can be used as well. This will give the lender the right to repossess and sell it if a person fails to make payments on time. And because an asset secures these loans, they are less risky for the lender. Thus, they have a lower average interest rate.
4. Unsecured car loans
Unsecured car loans are based on the borrower’s creditworthiness. And because there is no collateral involved, they usually have higher interest rates. Typically, applicants with a poor credit history will not qualify for these loans. However, you may also bring on a cosigner to make the process easier.
5. Student car loan
Some lenders help students buy their first automobile. They concentrate on the individual’s overall financial health and academic record.
6. Peer-to-Peer car loans
Peer-to-peer (P2P) lenders are the latest disruptors in the auto financing market. They are challenging the rates offered by the traditional banking sector. People with sufficient capital act as investors. They provide personal loans to people who wish to buy a car. However, they expect a return on their cash. So make sure you understand their terms before signing on the dotted line.
7. Dealer financing
Buying a car from dealerships has gained a significant amount of traction over the years. There are three possible alternatives when taking this route:
‘Buy-here, pay-here’ financing
This is when an auto dealer is the one financing the loan. The dealership determines whether a buyer is eligible or not. Make sure to read the fine print and understand if there are any additional charges involved. Since loan payments are made directly to the dealer, a missed payment can have serious consequences.
This is precisely what it sounds like. A dealer connects the borrower with a bank or lending institution that it has connections with. Though this is a time-saving option, you should do your homework before accepting any offers.
Often the interest rates are not as competitive. But that’s understandable because they are charging you for convenience. Moreover, the dealer will be adding on a fee for acting as an intermediary in the financing process. So, in essence, the dealer is involved from start to finish- from selecting a car to helping out with the loan.
Captive finance companies
Some automobile makers often provide in-house financing. They help buyers finance new as well as manufacturer-backed certified pre-owned vehicles. While a dealer may guide you through this route, you can also apply for an online loan from a captive finance company. Many times, they offer to appeal promotional incentives, such as loans with 0% APR for buyers with excellent credit.
Before you choose an auto loan, consider all your options. Do your research and compare the terms and rates. Figure out which one is the best one for you. Remember that your financial situation will determine the type of car you buy and the lender that you should approach.
More importantly, understand that your car is not an investment. It is an expensive necessity that will depreciate over time. So make sure that you comprehend the long-term repercussions of your loan payments on your monthly budget. Once you have a plan in place, there’s nothing to hold you back.
Ready to buy your first set of wheels?
About Michelle Joe: Michelle Joe is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences, and express herself through her blogs. You can find her on Twitter, LinkedIn, Facebook