Most people don’t have tens of thousands of dollars in savings lying around. Because of this, the average car buyer uses finance to cover the cost of their purchase. The price of cars in the United States is skyrocketing, so paying upfront is becoming more and more difficult.
However, while finance holds a lot of promise, it is something that it is easy to mess up. Messing up your car finance essentially means losing money. This post’s intention is to offer a comprehensive guide that you can use to understand the basics of car finance, so you don’t make a mistake.
Loan Term
The very first thing you need to think about if you are planning on using finance to pay for a new car is the loan term. Try to get the shortest term you can, because you’ll pay less interest back in the long run. The longer your loan goes unpaid, the more interest that will be added on top. However, not everybody can get a short-term car loan, so don’t panic if you can’t.
Just remember that if you have not fully paid your loan off by the end of the term, which you might not if you have an extended term, you will either have to pay the remaining amount outright or refinance your car. Refinancing means even more interest will be added on top, but your monthly payment amount will likely go down due to the payments you have already made.
Interest Rate
If you want to buy a car on finance, you need to make sure you get the best interest rate you possibly can. The higher your interest rate is, the more you will have to pay back. If you are planning on taking out a loan on an extended term, the interest rate is even more important. One of the best ways to get a good interest rate is to use a comparison site. A comparison site will show you all car finance offers you are eligible for. You can then go through the results and find the loan that feels right for you.
Monthly Repayments
Work out your monthly repayments before you enter into a finance arrangement. A lot of people make the mistake of borrowing money without first researching and finding out how much they are going to have to repay. The best way to find out how much you are going to have to pay toward your car finance each month is to use a calculator tool. Most finance lenders have their own calculation tools. Also worth noting is that your monthly repayments will be covered in your contract.
Initial Deposit
When you buy a car in finance, you have to put a deposit down. The amount you have to put down as a deposit varies from lender to lender. Some ask for 10% and others more. Put down as much of a deposit as you can, so that your total loan amount is reduced. Bringing down your loan amount will also bring down your monthly repayments and the interest you have to repay. It’s actually worth taking out a 0% loan with another lender just to put down a larger deposit if you are able to.
Late Payment Penalties
Before you enter into a financial arrangement with a lender, find out what the late payment penalties are. Every single lender has late payment penalties. Some lenders will add interest or charge a late payment fee, while others will go straight to default. As far as defaults go, you need to do everything you can to avoid them. A default can have a negative impact on your credit score and stop you from being able to take credit again in the future for at least six years. Defaults are issued when people fail to repay their loans. If you think you are not going to be able to make a payment on time, get in touch with your chosen lender and work something out.
Impact On Credit Score
Finally, think about your credit score. When you make a finance application, your credit score will drop slightly. If you do not have a very good credit score as it is and an acceptance is unlikely, wait until your score improves before you make an application for finance. This is because if you already have a bad score, hard searches can make it plummet further. One of the most effective ways to improve your score is to take a credit-building card out. You can also register to vote, pay back any outstanding loans, or just wait until it improves over time.
Car finance can be confusing at times. If you’re struggling with it, hopefully, this guide has made things easier for you. In spite of how confusing car finance can seem, it’s pretty simple once you know what you are doing. Make sure to shop around and get yourself the best deal you can.
