Smart Investing Starts with You: 7 Car Financing Tips from the Experts

There are a number of different ways to finance the purchase of a new or used car and not all of them will be appropriate for your requirements and credit profile. The best approach when it comes to something as important as car finance is to arm yourself with all the relevant information and answers you need before you commit to anything so that you know that the deal is right for you.

From working out affordability using a handy car payment calculator to understanding exactly what it is you are signing up for, smart financing starts with you.

Affordability is vital

The most important point to remember is that it never pays to overstretch yourself just to get the car of your dreams.

It is much better to set a realistic budget that you know you can afford, and if that means lowering your sights slightly with regard to the make, model, and age of the car you buy, that is more prudent than putting your household finances under pressure with payments that are higher than you can realistically afford.

To give you some idea on how much you should allocate to car finance out of your household income, it really should not take more than a quarter of your income, and ideally, a lot less than that.

New or used?

It can sometimes be easier to get car finance for a new vehicle and the interest rate you are charged might be lower than if you finance the purchase of a used vehicle.

One of the reasons for this is because a new car is in better condition, has no mileage issues, and no wear and tear problems to consider.

This means that when the finance company gets the vehicle back at the end of the term, if you don’t buy it outright, it will still have a reasonable residual value that should cover any shortfall in the amount owed.

With a new car, your monthly payment will likely include deals like a warranty, free maintenance, and roadside assistance, which means your monthly payment should potentially cover the cost of your motoring other than fuel and insurance.

You could buy a certified pre-owned car if you can’t afford a new car but want to know that the repairs aren’t going to stack up.

Search for cars in your price range

It helps to know what make and model you prefer and if you narrow your choices down to a few options that will help you to search out the best deal for the car you most want to drive.

Get your finance sorted before you visit the dealer

You should be mindful that car dealers can make a nice commission on the finance deal they sell you as well as the profit they make on the car itself.

If the dealer is motivated to sell you a car loan from the one loan provider they get a commission from over any others that could mean that you are not being offered the best finance deal.

A better approach is to secure a car financing deal elsewhere or at least confirm what sort of rates and monthly payments you could get elsewhere. That way, you can compare rates and terms with what a car dealer is offering you and make a more informed decision as a result of doing your research beforehand.

What’s your credit score?

It is always a smart move to check your credit score regularly and it is very relevant that you know what your score looks like before you start looking for car finance.

Take a look at your credit report and see what lenders will be looking at. If your score is poor and you have bad credit it is going to mean that you are charged a much higher interest rate on a loan, or you could be refused a loan altogether.

You can usually get a car loan, even if you have bad credit, but it will cost you.

Dealers might be offering an attractive interest rate deal on a new car in the showroom, but you won’t be able to get that if your credit score isn’t good enough.

Check your score so that you know what sort of finance deal you can get for your car.

Don’t be driven by the monthly payment

It is a good idea to know how much you can afford each month in terms of budgeting but your priority should be to keep the payment term as short as you can afford rather than let the monthly figure be your main guide.

If you tell a car salesman that you can afford a certain amount each month they are likely to find a way to sell you a car that fits that figure, but it could mean signing up for a longer finance deal in order to keep the monthly payment low.

The problem with extending the length of the loan is that you will be paying more interest charges than if you sign up for a shorter deal.

Try to find a decent downpayment

You might find a car dealer who can offer you the chance to drive a car away with little or no downpayment, but that is not a good idea for a couple of valid reasons.

Without paying something upfront towards the cost of the car you could end up owing more money than the car is worth at the end of the term.

You could also reduce your monthly payments with a decent downpayment, so the sensible and prudent thing to do is to put as much cash as possible down towards the balance when you buy your car.

If you follow some of these savvy car financing tips it should help you choose a car and a finance deal that suits your finances and helps you avoid making an expensive mistake that you could be reminded of every month when your auto payment leaves your account.