We recently caught up with Erica Silva to discover which 4 things you should be mindful of when financing a car for the first time. This is what she said…
“If you are in the market to finance your first car, there are a lot of confusing questions that come in your mind. The process can become an overwhelming experience due to the amount of money and the number of jargon involved.
You may think that you’re considering all the factors and getting the best deal, but the excitement of the situation can get the better of you and prevent you from making the right decision.
In this blog, we have covered different aspects of a car financing process and discussed various financing options that you can consider to purchase your first car. We have also shared some useful tips to make sure that you get the best possible deal on your purchase. Let’s get started!
1. Determine a Budget
The first step involved in financing a vehicle, or any item, is to create a budget. By setting up a budget, you narrow down your options to the ones within a price range that you can afford.
When setting up a budget, consider all your monthly income and expenses, including your rent, utility bills, loan payments, etc. Once you do that, you will be able to identify areas where you could cut back, which will make your monthly car payments more affordable.
Many people are lured into car financing due to lower down payments or monthly instalments, and fail to consider the additional costs that go into auto registration, insurance, maintenance, petrol, and other running costs. Thus, it is prudent to factor in all these costs to be able to pay the instalments.
2. Research the Financing Options
Once you’ve created a budget and narrowed down the car choices within your price range, it is time to develop a working knowledge of the available financing options. There are several auto-finance options; the most popular among them are:
An auto loan is a financing option that enables you to buy a vehicle in monthly instalments rather than making full payment upfront. Auto loans include fees, interests, and taxes that add up to the principal amount of the loan.
Banks, credit unions, and many car dealerships offer loans; however, securing one will depend upon the borrower’s income, affordability, and credit score.
You can also approach your local car dealerships to secure a loan. Various dealerships, like Redline Cars, etc. offer a financial coverage plan to aid the customers. These plans, in most cases are more convenient and a one-stop deal.
Dealers can undercut other lenders because of the subsidies available to them from car manufacturers for the sale of new cars.
In case of a bad FICO score, borrowers can also consider a finance company for an auto loan. Some financiers also lend money based on whether a borrower is a reasonable credit risk.
Whatever lending source you use, it is vital to keep yourself informed of your credit score, the local interest rates, and any hidden fees that will inflate the final cost of the car.
Hire purchase (HP) is an auto finance option in which the lender owns the vehicle until the total repayment has been made. It involves a dealership who sells the car to a finance company who then rent it to you for an agreed period.
It is a simple option because the dealership or garage that you are buying the vehicle from may be able to arrange the finance for you on behalf of a finance company.
Before choosing the hire purchase option, make sure that the garage is authorised to perform HP on behalf of a company. You can check out the authorised Credit Intermediaries on CCPC corporate site.
Auto leasing is another popular car finance option that involves a lessee (user) and the lessor (owner). It involves a contractual arrangement that outlines the terms under which the lessee rents the car owned by the lessor.
Auto leasing also involves a financial institution that funds the difference between the price of the automobile at the beginning of the lease and its final residual value. The monthly instalments will depend on the lease period, interest rate, and the expected residual value.
These are some of the best financing options that first-time car buyers can consider to purchase a vehicle.
3. Evaluate Your Credit Score
Once you have created a budget and explored the optimal financing options, you can start evaluating your credit score/FICO score. Knowing your score beforehand will give you an idea of the loan term and the interest rate that you will likely qualify for.
Get a copy of your FICO score and make sure that the rating is accurate. Several bureaus can provide credit scores and reports for free. Check the score in the beginning because if it falls somewhere below average, you will have to improve it to avoid higher interest rates.
4. Consider a Larger Down Payment
The most common way to finance a vehicle is to pay the entire amount upfront. But since it isn’t possible for most of us, you need to save up for down payment. Most dealers like to see a down payment that is around 20 percent of the vehicle’s price.
You can even buy a car without any down payment, but it will result in strict loan terms with the highest interest rates.
Generally, a large down payment will help you earn more favourable loan terms and will save you more in the long term. It will even offset a poor credit score since you’ll have lower outstanding money as you drive the car off the lot.
Many automotive websites offer an online calculator that calculates the optimal down payment amount and its impact on your monthly instalments. You can use these calculators to arrive at the best amount with favourable loan terms and lower interest.
A car purchase is a big financial decision, so you need thorough knowledge about every aspect of the process. Educate yourself and evaluate your options, so that you go into the negotiations well-prepared to get the best possible deal.”
Who is Erica Silva?
Erica Silva is a blogger who loves to discover and explore the world around her. She writes on everything from marketing to technology. She enjoys sharing her discoveries and experiences with readers and believes her blogs can make the world a better place.
Find her on Twitter: @ericadsilva1
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