Finance Globe

U.S. financial and economic topics from several finance writers.
7 minutes reading time (1316 words)

First Step to Buying a Vehicle - Financing

If you're thinking about buying a vehicle, there are a quite a few things to consider before settling on the car you're going to drive home.

But the first thing to think about is how you're going to pay for it. Figure out how much you're willing to pay or how much you can afford, and whether you're going to use cash or credit. Do you have enough money saved to outright purchase it? If you do, you'll save substantially on interest payments.

Plus, another benefit to paying in full for an automobile is that since you'll own it, you'll have the option to carry whatever comprehensive/collision insurance you deem necessary with the deductictibles you see fit. This can save you money by going with higher deductibles; auto lenders typically require that you carry comprehensive/collision insurance with a maximum deductible of $500 - and a higher premium.

Clean up your credit before getting a car loan
Or will you need to obtain financing? If you need financing, it's imperitive that you begin your car shopping experience by first checking out your credit report and credit score. If there are any issues with your credit, get those resolved before hunting for an auto loan.

By cleaning up your credit first, you'll get better rates on your auto loan and it's very possible to save fifty to a hundred dollars a month on your car payment. A couple of percentage points on a big car loan can make a huge difference in your monthly payment.

You can get a free credit report from all three credit bureaus: Experian, Equifax, and TransUnion by requesting your reports at www.annualcreditreport.com. This is the only site authorized by the federal government to provide you with the credit reports that you are entitle to by law as part of the Fair Credit Reporting Act.

There's no charge for the credit reports, and you won't be required to sign up for a "free trial" to get them. Your credit scores are not included but you can order them when you order your free reports if you want to.

It's great if you can get a several month headstart before you actually seriously start shopping for an auto; it may take several months for credit issues to be resolved and show up on your credit report as being paid. It may take closer to a year to deal with complex issues, especially if you don't have the money to pay off overdue accounts right away.

Find your financing before finding an auto
Once you have your credit polished up, the next step is to check out the financing that's available to you. A good place to start is your local bank or credit union; you may be able to get a better deal if you are already an account holder. Sometime's that's not the case, so be sure to check with other banks in your area to do some good comparison shopping.

Credit unions are known for better deals in general, but not always. And credit unions will only give loans to members, so a good practice is to check with any credit unions you are a member of, and the credit unions where you qualify for membership; it may be worth joining the credit union just to get that good auto loan rate.

But credit unions aren't always the best deal - sometimes banks have more competitive rates, so be sure to check around, locally and online. Banks will give a loan to anyone who meets their credit standards even if the customer doesn't have an account at their bank.

Once you find the financial institution that can offer you the best interest rate, apply for a pre-approval. This will let you know what price-range you should be shopping in, and the expected monthly payment.

Getting direct financing from a financial institution will often get you a better deal than what a dealership can do for you. It also gives you the option to skip the dealership and purchase a car directly from a private seller. The private seller doesn't need to profit off the sale of his car, they just want to get rid of it to make room for another vehicle or to save on monthly expenses. Whatever their reason for selling, it may save you several thousand by avoiding the dealership that needs to profit from their sales.

Or get lending from the dealership
Maybe you weren't able to clean up your credit before shopping for a car, you weren't able to get financing from a financial institution locally or online, or you were just too lazy to do the legwork yourself.

It's okay, you can probably still get a car loan, just know that you're likely to pay more by going this route. The one exception is the special financing deals where you may get an unbelievably low interest rate from the manufacturer by buying a new car, usually vehicles that would be classified as "luxury." Just remember that while the interest rate may be really low, you're getting socked on the depreciation by buying a brand-new car. Only you can decide if new is the way to go - but don't let yourself be talked into buying a new car above your comfortable price range just because the financing is a good deal.

But aside from the special deals, car dealerships tend to have business relationships with a number of lenders, some of which will specialize in different credit situations. Some of these lenders will loan to applicants with "iffy" credit, but of course the borrower will be paying for that privilege in the form of a higher interest rate.

About "buy here, pay here" dealers
This is the car dealership of last resort. Before obtaining financing at one of these dealerships, please be sure to exhaust the above methods first. If you find that absolutely no one will give you a car loan because your credit is just that bad and you don't have the money saved to purchase a car outright, then a "buy here, pay here" dealership may be the answer for the truly desperate.

These types of dealerships typically have lower-priced vehicles, generally in the range of several thousand, rather than the tens-of-thousands price range. You are likely to find older cars with higher miles, mechanical issues, faded or chipped paint, and the interiors may be in desperate need of repair or cleaning.

The dealer who sells you a car in this manner is giving you the financing; there won't be any third party who loans the money out. Small lenders like these guys don't have a huge amount of capital to work with, so you will pay heavily for the loan.

Payments are typically due every one or two weeks. This is to coincide with the borrowers' paydays; dealers know that borrowers with a challenging credit record or financial troubles can pay $100 a week more easily than $400 a month in one payment. Plus, it allows the dealer to catch on more quickly if the borrower is having a hard time paying, and may be able to repossess a car for missed payments after two weeks rather than waiting two months.

If you go this route, know you may end up paying several thousand more than the car is worth by the time it's paid off. And at the very least, pay it off as quickly as you can.

I'm not completely knocking "buy here, pay here" dealerships, I'm just saying that the financing is a bad deal for consumers. If you have the cash saved and want to buy a very inexpensive car, then these guys are likely to have a larger inventory of cheap cars than a traditional dealer that tends to stock new and "previously owned" vehicles. Just stay away from the financing if you have any other options available.
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Friday, 22 November 2019

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