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How to finance a car Part II: Sources of financing Part III: Financing a new car versus a used one Part IV: Leasing versus financing Part V: Maybe you need a car to get back and forth to work, or to drive your children from school to soccer practice.
Unfortunately, cars — and especially new cars — cost a pretty penny. But how do you take out a car loan? Borrowing money for a car works similarly to taking out other types of loans. You apply for a loan and if you are approved, you make monthly payments until the balance is paid off.
Not only will this reduce the amount of money you need to borrow, which can lower your monthly payment, but you might also qualify for a better rate on your auto loan with a larger down payment. Keep in mind that your car payment needs to make sense with your income and your other bills.
To that end, it might help to write down how much you earn each month and consider that figure in the context of your regular bills and liabilities. Leftover money is cash you could save and potentially spend on a car payment plus upkeep and insurance. This rule of thumb suggests you should put down at least a 20 percent down payment, finance the vehicle for no more than four years, and keep your total transportation costs under 10 percent of your monthly income.
While your new monthly payment is important in terms of your budget, you should also consider the total costs of borrowing for your car. You can typically lower your monthly payment by lengthening your car note i. Longer car loans tend to put people in the position of having negative equity, or owing more than their car is worth. Not only should you take into account dealer fees if applicable , license plates, state taxes and title fees, but you could also consider the costs of maintenance, repairs, insurance and gas.
While the purchase price of a car is important, the CFPB notes you should also consider the resale value of your car. This is especially true if you plan to sell or trade in your car before you pay it off. Individuals with a lower credit score considered deep subprime credit scores below , subprime scores from , or nonprime scores typically pay higher interest rates to borrow money for an automobile.
Banks and lenders charge these higher APRs to individuals with low credit scores to make up for the increased risks they face when lending to less-qualified borrowers. Keep in mind that you can absolutely get an auto loan with bad credit , provided you have proof of income and the ability to repay. To provide more depth on the subject, the following table illustrates how your credit score can impact the APR on your car loan:. Pay attention to the sales price, the monthly costs of ownership and the long-term costs of financing a car.
Your monthly payment is especially crucial to consider since you may be paying it for 60 months or longer, for example. Your monthly payment is an important measure of affordability for sure, but you also need to focus on the total sales price and long-term costs of ownership.
Unfortunately, many people extend the length of their loan to bring the payment for the car they want in line with their budget. In addition to negotiating sales price, the CFPB notes you should also negotiate the trade-in value for your old car if trading in a vehicle , your new loan APR and your loan length.
In addition to the costs of borrowing and financing a car, there are additional expenses involved in owning and maintaining a vehicle. Auto dealerships are notorious for offering lots of add-ons you can roll into your auto loan. These add-ons can include things like extended warranties, GAP insurance to insure against rapid depreciation, credit insurance, and additional features like auto alarms, window tinting, and tire and wheel protection. Before you sign on the dotted line, make sure you read your auto loan document in its entirety.
If you fail to read the fine print, you may be in for an unpleasant surprise. Some lenders will try to add in prepayment penalties for paying your car off early, for example. The best type of auto financing for you depends on an array of factors including your credit score, any relationship you might have with a bank, and any dealer incentives offered. Of course, these factors depend on your unique buying situation. According to Jonathan Olsen of auto financing website rateGenius.
Your primary bank may be able to offer you a loan with a lower APR than you could get elsewhere, although it really depends. Online institutions may offer less of a personal touch, but their loan offerings are similar to those from brick-and-mortar institutions.
Applying for financing from a car dealership is popular among auto buyers who purchase both new and used cars. With dealership financing, you can complete your entire auto purchase all in one place. Home equity loans let you borrow a fixed amount of money against the equity you have in your home.
Home equity loans are fixed-rate installment loans, meaning you pay the same APR and monthly payment throughout the life of the loan. With a personal loan from someone you know, you could get into the car you need faster and without all the red tape. But, is borrowing money from family and friends a good idea? Maybe, but not always, says Olsen. By checking rates ahead of time, you can gauge the market and what you may be able to qualify for in terms of APR. Here, you can compare loans based on the type of financing new car, used car or auto refinancing , loan term, make and model of car, mileage, employment status and income.
Financing a new car works similarly to financing a used car, says Olsen. Still, there are several differences that can vary depending on the purchase. Those differences can include:. Price — Olsen says one of the biggest differences in financing a new or used car is price, and statistics seem to agree.
Depreciation — Research shows that new cars depreciate a lot faster than used cars. Before you buy a used car, make sure you know how much it will be worth in the future — especially if you plan to sell within a few years.
The following table shows how buying and financing a new or used car might look in terms of price, long-term costs and depreciation:. When you lease a car, you agree to pay a set monthly payment to drive the car for a predetermined length of time. The difference is, you must return the car when your lease offer is over unless you choose to exercise an option to purchase.
While leasing can be a good idea if you want to drive a new car without the commitment, there are notable downsides to consider with leasing, too. The following table can help you determine which is better — buying or leasing? Some dealerships offer in-house financing to people with poor or no credit.
While these dealerships may be a suitable option if you need transportation in an emergency, they offer higher interest rates than you could get with a bank or online lender. You can get a free copy of your credit reports annually from AnnualCreditReport. Several websites such as LendingTree also make it possible to get a free estimate of your credit score.
If you have poor credit, you may be asked to get a cosigner for your car loan. This person will take out a car loan with you, making themselves mutually and individually responsible for the repayment of your loan. The best ways to reduce the amount of your car loan and monthly payment are saving up a large down payment, buying a less expensive car and choosing a vehicle with fewer features. Getting preapproved by a lender for an auto loan up to a certain amount is a good way to start your search for a new or used car.
Having a preapproval letter in hand may even put you in a better bargaining position with a dealership. Shopping around for the best loan will have minimal impact on your credit report, if any.
The benefit of shopping around and getting a lower rate will far outweigh any downsides. To minimize the impact of hard inquiries on your credit report, try to do all of your loan shopping within a period of days. Down Payment on a Used Car: How Much To Put Down. How to Avoid Car Leasing Charges. Learn How to Determine a Cars Value. Johnson November 30th, How to finance a car But how do you take out a car loan?
How much car can I really afford to finance? Determine how much car you can afford. Factor in all the costs of ownership. How my credit score impacts my auto loan APR Individuals with a lower credit score considered deep subprime credit scores below , subprime scores from , or nonprime scores typically pay higher interest rates to borrow money for an automobile.
To provide more depth on the subject, the following table illustrates how your credit score can impact the APR on your car loan: Before you buy a car or apply for an auto loan, try to avoid these mistakes at all costs: Forgetting to factor in additional expenses In addition to the costs of borrowing and financing a car, there are additional expenses involved in owning and maintaining a vehicle.
Rolling lots of add-ons into your auto loan Auto dealerships are notorious for offering lots of add-ons you can roll into your auto loan. Not reading the fine print Before you sign on the dotted line, make sure you read your auto loan document in its entirety. Bank or credit union According to Jonathan Olsen of auto financing website rateGenius. Pros of getting an auto loan from a bank or credit union include: And you may not be penalized as much for having a low credit score if you have a long relationship with the bank already.
Personal touch — Olsen notes that many people turn to banks and credit unions when getting an auto loan because they prefer to interact with a lender in person.
Cons of getting an auto loan from a bank or credit union can include: Lack of technology — Small credit unions and banks often lack some of the technology that consumers like — perks like online bill-pay, automatic payments or online account management. Higher interest rates at banks — Olsen says credit unions tend to offer lower APRs than banks.
Online auto lenders Online institutions may offer less of a personal touch, but their loan offerings are similar to those from brick-and-mortar institutions. Some of the pros of getting an auto loan online include: Further, shopping around online is a good deal whether you decide to go with a bank or not. Price — Depending on your credit score and loan offers available, you may qualify for a lower APR and better loan terms with an online lender.
Cons of getting an auto loan online include: