The car market has been experiencing unprecedented shifts in recent years, mainly owing to inflation and rising vehicle prices. These changes make it both difficult and exciting for first-time car buyers.
When buying a car during times of economic uncertainty, it is important to plan properly so you make the right decisions.
While car prices keep rising and inflation continues to influence lending terms, this guide provides practical advice for getting the best car finance deals available.
Rising Car Prices and Inflation
The cost of goods and services everywhere have been driven up by inflation, and car prices are no exception. The price of both new and used vehicles is soaring due to higher manufacturing costs, supply chain disruptions, and higher demand.
Interest rates are not only affected by inflation, but also vehicle prices. The interest rates for car loans are affected by inflation and the economic climate. For a first time buyer, understanding how inflation impacts the price of the car as well as the terms of financing is important to budgeting.
Types of Loans Available to First-Time Buyers
There are many financing options you can choose from when buying your first car. Choosing the right type of loan depends on your financial condition and your goal.
Personal Loans
Unsecured loans such as a personal loan don’t require any collateral like a vehicle you are buying or a co-signer on. While these loans tend to be more flexible in what you can do with the money, they also often carry higher interest rates than secured loans. It’s important to decide if the higher rates are worth the extra freedom in not having to put your car at risk.
Hire Purchase
With a hire purchase loan you make fixed monthly payments towards owning the car. Once you have made all the payments, the vehicle is yours. This method is simple and costs are easy to predict, but it does require a larger initial deposit. It also might end up costing more in the long run if you are paying high interest rates.
Personal Contract Purchase
Under Personal Contract Purchase (PCP) the cost of the vehicle is separated from its value during its useful lifetime, which results in lower monthly payments. At the end of the term you can choose to buy the car, return it or trade it in. The risk here is that if you do choose to buy the car, you will be paying lower payments, but with a bigger balloon payment at the end.
The Importance of a Strong Credit Score
One of the most important things in choosing the terms of a car loan is your credit score. A high score can also help you get a loan with a lower interest rate, which will make your overall car purchase less expensive.
Check Your Credit Before Applying
It is important to check your credit score before applying for any loan. If it’s on the lower end, think about how you can improve it by paying down any debts you have or cleaning up your credit report before looking for financing. Having a higher credit score will get you better loan terms and save you money in the long run.
Understand How Your Score Affects Loan Terms
Your credit score is used by lenders to determine if you will repay the loan. Not only does a higher score help you get lower rates, but it can also help you choose the best loan type. Keep in mind that if your score is not the best, you can still get financing but with higher interest rates.
Negotiating a Fair Interest Rate
Although inflation has pushed interest rates higher, you can still negotiate a better deal. While the economy dictates most of what lenders offer for base interest rates, borrowers with good credit histories have room to negotiate.
Shop Around for the Best Deal
Each lender has different interest rates and terms, so it’s critical to shop around. Don’t be afraid of contacting several institutions, such as banks, credit unions and online lenders. Sometimes, negotiating terms with a lender can get you better interest rates.
Leverage Your Credit Score for Better Terms
If you have a good credit score, leverage it in negotiations. If you’ve been able to pay your debts and other loan payments on time, lenders may be more inclined to offer you better interest rates.
Balancing Affordability and Value
Given that prices for both new and used cars continue to rise, it is more important than ever to find a car for a reasonable price. First time buyers should put long term affordability first, above immediate desire for a car.
Choose a Vehicle Within Your Budget
Don’t make the mistake of stretching your budget for a car that looks attractive but may not be financially sustainable. Stay within your pre-determined budget and concentrate on vehicles that balance cost, reliability and fuel efficiency.
Navigating the Car Buying Process with Confidence
To secure the best financing deals in today’s market demands a strategic approach. Car prices are rising and inflation has made it more difficult to buy your first car, but with a little planning, research and a solid understanding of your financing options, you can make an informed decision. If you are going to use a personal loan, hire purchase or personal contract purchase, make sure you negotiate the best terms you can and that you prioritise long term affordability.