What is the smartest way to finance a car?
What Is The Smartest Way To Finance A Car?
We all wish we had enough cash to never need a loan. After all, cash is king for a reason. Buying in cash gives us more negotiating power, can keep us from overspending, and frees us from years of car payments.
But for most of us that is impossible, and financing is the only way to go. We must trudge out and find a lender to make our car dreams come true. So what is the smartest way to finance a car?
Here are our top tips for financing a car the smart way.
Understand the importance of your credit score and prepare accordingly.
The car loan APR that you will be offered will be based on a few different factors. Calculating APR takes the following into account:
- Credit history
- Principal amount
- Length of term
- Vehicle
- Down payment
- Current market rates
The most important factor of all is your credit score . Credit scores are used by lenders to determine the likelihood of an on time repayment. A higher credit score will get you a more favorable car loan APR because they will view you as less of a risk.
This means it is incredibly important to make sure your credit score is in tip top shape before you even apply for financing. Credit scores are broken down into the following brackets:
- 800 to 850: Excellent credit
- 740 to 799: Very good credit
- 670 to 739: Good credit
- 580 to 669: Fair credit
- 300 to 579: Poor credit
A credit score of 750 or higher will put you in the position to get the best rates possible, so aim to get your credit score as high as possible. Having a lower score doesn’t mean it’s impossible to get a good deal, but you will need to shop around and compare a lot more. Preparing ahead of time to get your credit score in good shape is critical when looking for financing. There are a few steps you can take to try to increase your score.
- Get a copy of your credit report and review it for errors and unrecognized accounts.
- Pay your bills in full and on time.
- Pay down your debt, especially on accounts where your credit utilization ratio is high (the amount you owe compared to your credit limit).
- Avoid closing credit lines, even if you don’t use them.
- Request higher credit limits on your accounts.
- Avoid opening new accounts and try to avoid any hard inquiries on your credit.
These steps can help you to get the best car loan APR possible. Good credit scores can help us in many other aspects of our lives too. A good score can get you better rates on car insurance, get you approved for a mortgage or lease, and get utility services set up easier. Life is just easier when you have a higher credit score.
Know what fits into your budget before you go shopping.
You should have a very clear idea of just how much you can afford on car payments before you even step foot into a dealership. The general rule is to pay about 10-15% of your monthly income on car payments, and 20% or less on all transportation costs combined. This would include gas, insurance, and routine maintenance.
While this is a great guideline, make sure that this actually fits into your budget. Determine all of your monthly income and all of your monthly expenses to see how much you can actually set aside for payments. This will also help you determine how much you should put as a down payment.
Get pre-approved beforehand.
Getting pre-approved ahead of time gives you a lot more negotiating power when you enter the dealership. If you can get approved for a relatively low car low APR before you go shopping, the dealer has a mark that they will try to beat. Try to get a few different pre approvals so that you can compare all terms and get the best loan possible. In addition to the car loan APR you want to compare customer satisfaction ratings. If customers seem unhappy with the lender, it’s probably a sign to look elsewhere for financing.
Pre approval also gives you a little more peace of mind when looking at cars because you will already have an idea of the interest rate and will have an idea as to what your payments will look like.
Make a 20% down payment.
Down payments are important for two main reasons: they will significantly reduce your monthly payments and they will help prevent your loan from becoming underwater.
A down payment of at least 20% is recommended by most experts. This is money that you will completely avoid paying interest on, so the more you can put down the better off you will be in the long run. And since most depreciation happens in the first year of the car’s life, it will help to curb that amount. Cars typically lose about 20% of their value in the first year.
Being underwater in a car loan means that you owe more on the loan than the car is worth. Let’s say a car costs $25,000 and you put no money down as a down payment. At the end of one year, you most likely have only paid off $3500 or $4000, but your car has already depreciated to $20,000. You already owe more on the car than you would be able to get if you sold it. Being underwater in your loan will make it very difficult for you to ever refinance your loan as well. So it’s best to make a significant down payment and avoid being underwater.
Choose a short loan term.
Short term loans mean that you will pay less interest over the life of the loan. Your monthly payments will be higher as your repayment will not be spread out as much, but you will save a significant amount of money by not paying as much interest. Dealerships like to use “lower car payments” as a selling point when negotiating. They do this for a few reasons:
- It makes it seem like you are saving money, when in reality you are paying them more money over the life of the loan
- It makes you feel more comfortable to select a more expensive car
- It gives them room to try to sell you more add-ons and upgrades
Dealerships may try to convince you that spreading out your payments over a longer period of time is a good idea, when in reality it just gives them more ways to get more money out of you. A term of three years or less is best when looking into financing unless you need extra room in your monthly budget.
Use cash for the taxes and fees.
When you are shopping for a car, it’s easy to only look at the sticker price and try to work the numbers using only the MSRP. But in reality, cars cost much more than just the list price. Sales tax can easily run you a few thousand dollars. Add on the various fees such as the origination fee, dealership fee, and advertising fee and you are talking several thousands of dollars in addition to the cost of the car. But if you use cash for these fees it can help ensure that your financing amount is still reasonable.
Refinance your loan if the terms aren’t ideal.
It’s not hard to get into a bad situation with a car loan. Maybe the salesman was smooth talking and convinced you that you were getting a good deal, or maybe you were not a particularly desirable candidate for financing when you initially applied. But there’s good news: car refinancing can get you out of a bad car loan.
When you refinance, you want to follow the same smart steps you would take to finance your original loan. Making sure your credit score is in good shape is at the top of the list. You also want to shop around and compare rates and terms. Using a company that specializes in car loan refinance can help you compare and get the best rates possible.
Those are our top tips for financing your car the smart way.
A little preparation can go a long way when looking to get a loan. Making sure your credit score is in order, getting pre-approved for financing, and comparing offers are all great ways to ensure you are getting the best deal possible. Make sure you consider traditional banks, credit unions, and online lenders when researching your options.
If you already made a deal that you are looking to get out of, consider refinancing your car loan with Auto Approve . We have relationships with lenders across the country so you can be sure you will get the most competitive car loan APRs out there. And with a 96% would-recommend rating on LendingTree, you know you are in good hands.
5 Ways To Pay Off Your Car FASTER!
Car loans are some of the most common personal debts owed by modern drivers. Paying off your car loan early can put you on the path to financial independence by reducing the amount of loan interest you pay over time. Are you wondering how long to pay off car loans so that you don’t end up upside down on your loan?
When it comes to how long it takes to pay off a car loan, the most common loan term is currently 72 months, followed by 84-month terms. So if you’re one of the 70% of car owners with a term of 60 months or longer, you’re far from alone. The good news is, paying off a car faster than its stated term is entirely possible when paired with the right motivation, mindset, and money management skills.
Why Is It Important To Pay Off Car Debt Fast?
According to credit reporting agency Experian, monthly payments for vehicles range anywhere from $550 for new cars or $393 for used cars. Monthly lease payments fall into the middle of both figures, amounting to $452 on average. These numbers are made much higher when paired with low credit scores, poor credit history, and missed payments.
With thousands of dollars paid on principal and interest every year, many vehicle owners are driven to pay down their debts and become financially independent. However, the large amounts of money associated with an auto loan and often daunting business jargon can cause many individuals to assume the worst about their financial situation.
As a significant portion of the average American’s monthly expenditure, car debts are often large obstacles on the path towards pure financial freedom. The faster car debts are paid off, the faster personal wealth can be grown and managed. Implementing an actionable plan for paying down personal car debt is an excellent method of removing excess financial burdens that affect your lifestyle goals.
5 Techniques For How To Pay Off Your Car Faster
- Reduce Your Term Length
- Try Out A New Budget
- Look For A Side Gig
- Make Extra Payments
- Refinance
No matter the size of your monthly car payment, there are five unique ways that vehicle owners can pay down their principles in a short frame of time. Remember that paying down the balance of your auto loan is never a race, but a marathon that requires dedication and determination to complete. Mapping out your projected time frame creates a framework that functions both as a nemesis and an accountability partner.
1. Reduce Your Term Length
A loan term is the amount of time a borrower is allowed to pay back the funds provided to them from the bank. Terms are typically measured in months and can range anywhere from 24 to 84 months in length. The longer the term length, the smaller the monthly payments will be.
However, smaller monthly loan payments do not equate with paying off your auto loan faster. Taking as long as seven years to pay off in full, car loans can last for a significant portion of your primary working career. Choose to reduce your term length to a number that best reflects your personal financial goals, taking care to calculate your monthly payments using a financial calculator.
As an additional bonus, shorter-term lengths often are associated with lower interest rates. In the end, shorter-term lengths are an excellent way to reduce total payments and conserve your financial resources.
2. Try Out A New Budget
Reallocating your current income for the financial goals that matter most is paramount to paying off a car loan faster.
If you don’t already have a budget, sit down and make a list of all income estimated for the month. Create categories of expenses that apply to your lifestyle, including your auto loan. How many categories could be reduced for a certain time while payments are being made?
Budgets can be created by writing with a paper and pencil, utilizing a spreadsheet application, or finding an online alternative. Budgeting apps are available for virtually all devices, and most of them are free to use. Be sure to pick a method that supports your lifestyle best.
3. Look For A Side Gig
Raising your income is the most efficient method of amassing wealth. The more money you can earn, the more you can put towards paying off your car loan faster.
Find ways to raise your monthly income using resources available to you. Ideas for boosting monthly income may involve:
- Finding a second job
- Freelancing
- Working weekends or overtime at your primary job
- Having a garage sale
- Crafting and selling items
Be sure to choose an option that is both sustainable and enjoyable, helping to reduce fatigue and burnout.
4. Make Extra Payments
Ultimately, the amount due on your car loan will not be paid off faster unless you make additional monthly payments on the principal.
Most people choose to make extra payments on their car loans in one of three ways:
- Paying Twice A Month: Making two payments that are more than your monthly bill will not only pay off the principal faster but will reduce accrued interest.
- Paying The Principal: Make payments that directly impact the overall cost of the vehicle instead of the interest rate.
- Rounding Up: Make an extra monthly payment on the amount of your current auto loan rounded up. For example, if you pay $515 per month, round up to $600. If you pay $375, pay $400.
5. Refinance
Refinancing your current auto loan is one of the fastest methods of paying off a high-interest car.
As credit history lengthens and credit scores rise, vehicle owners may find they are eligible for more agreeable, lower interest rates.
However, there are both pros and cons to refinancing a vehicle. Owners should be cautious while weighing their choices.
To see if your loan is eligible for refinancing, check with an auto loan officer about your options.
Pay Off Your Car Faster With A Refinanced Loan
If high-interest rates are keeping you from quickly paying down your vehicle principal, the best solution may be to refinance your auto loan with Greater Texas Credit Union.
Offering a host of unique benefits, low-interest rates, and no prepayment penalties, our custom auto loans are a quick and efficient method of paying down existing car debt all within a time frame that suits your lifestyle best.
Interested in seeing what Greater Texas Credit Union can do for your car loan needs?
Used Car Financing Guide
Thinking about financing a used car? If so, you likely have some questions – how does it work? Am I eligible? What’s the best way to finance a used car? Is it better than leasing? The good news is, we’ve got all the answers right here. This comprehensive guide will take you all the way down the road of used car finance so you can decide if it’s right for you.
How to finance a used car
Here are the steps to take when financing a used car:
- Understand how financing works
- Check your credit score
- Set your monthly budget
- Compare loan interest rates
- Prepare car financing requirements
- Get pre-approved
- Shop for a vehicle
- Finalize the paperwork
How does financing a used car work?
Because the cost of buying a new car can be quite expensive these days, a great alternative to consider is financing a used car. Financing a used car means getting a loan to pay for the vehicle so you don’t have to come up with the money all at once. There are a few different ways you can do this – either through a dealership, a bank/credit union or online – which we will explain more later.
How can I check my own credit score?
If you’ve ever gotten a loan or applied for a credit card, you have a credit score and it affects your ability to get a loan for a vehicle and the rate you receive. The higher the score, the better your chances of getting a loan at a good rate as you have a proven track record of paying things back in a timely manner. The lower the score, the more challenging it can be (although not impossible). To check yours, visit Equifax Canada or TransUnion Canada.
How much should I spend on financing a used car per month?
When it comes to smart auto financing, a good rule of thumb is the 20/4/10 equation. According to this way of thinking, you should put at least 20% towards the down payment, finance for four years and keep your monthly payments around 10% of your gross monthly income. Some agreements may be a bit longer and that can be OK in some cases – just make sure it works for you. Don’t forget to keep in mind total operating costs of the car so you can make sure it all works within your budget.
How do I find the best interest rate?
There are two options when it comes to interest rates: fixed or variable rates. With a fixed finance rate, the interest amount doesn’t change for any reason over the duration of the loan. The downside? If the market rate decreases, you still have to pay the rate you locked in at. The upside? If the market rate increases, your payments stay at the lower rate you locked in at. Variable rates offer more flexibility but can add more risk, as fluctuations in the market could cause rates to increase or decrease – it’s a bit of a gamble either way.
A helpful tip: CPOs (certified pre-owned vehicles) typically come with better interest rates, plus you know it’s a great car because these vehicles undergo rigorous safety inspections, fit certain age and mileage requirements, and typically come with extended warranties.
What do I need to finance a used car?
When financing a used car, your greatest ally is knowledge. Make sure you have all your ducks in a row by gathering the documents you’ll need for the journey, including proof of address and proof of income. Then, do your homework – know your credit score before you apply, research lenders, compare different used car financing options, you can even apply for a used car loan before you start looking (more on that later). Another really important step in all of this is learning how to recognize red flags, like loan markups and hidden fees.
How do I get pre-approved for financing?
Whether you have good credit or bad credit, one place to start is to get pre-approved financing before you even set foot in a vehicle. Shop around to 2 or 3 lenders to make sure you’re getting the best rate, starting with your own banking institution or credit union. Once you determine the one that’s right for you, simply apply for auto loan pre-approval and away you go. You can also work through a dealership to get pre-approved before you begin shopping their lot.
Where do I start looking for a vehicle to buy?
Start online by checking out your local used car dealerships and searching through their available inventory. Another option is to check listing sites like autoTRADER.ca and Kijiji Autos. No matter what vehicle you’re interested in, make sure you take the time to inspect it properly: have a look at it in person, take it for a test drive and be sure to get the full vehicle history report.
How do I finalize my paperwork?
Now that you’ve found the vehicle of your dreams, it’s time to close the deal. On the finance side of things, sign the loan contract with your lender or through the dealership, set up monthly withdrawal payments, (the first payment will probably be due within 30 days), and most importantly, make sure you understand the financing terms of your agreement. If you have any questions whatsoever, now is the time to ask!
On the car sale side of things: Sign the bill-of-sale contract, ensure you have proof of insurance, (a copy of which should always be kept in the glove compartment), and complete your registration information, including the license plates. Remember, every province has its own regulations for finalizing a sale, so make sure you follow yours.
Should I finance or lease a used car?
The difference between financing and leasing a car can be likened to renting vs. owning a house. Leasing is like renting – you enter into a contract through the dealership agreeing on a set monthly payment schedule and time frame for using the car. Leasing can offer lower monthly payments and shorter terms, as you’re not paying to own the vehicle at the end of it all. However, there are restrictions that come with this option, like a kilometer/year cap. Leasing is less common in used vehicles, but not unheard of.
Financing a used car is like owning a house – you get a loan directly from the bank/credit union or through the dealership with the intention of paying off the car in full so you own it in the end. Compared to leasing, there are no kilometer limits or additional penalties to watch out for, and you can customize the vehicle however you’d like because you don’t have to give it back. However, financing can incur higher monthly payments and longer terms. Either way, they’re both great choices as long as you’re aware of the terms and it works for you!
What is the best way to finance a used car?
With so many options on the market, it’s important to find out which one is best for you, so it fits into your finances. So, how do car loans work for used cars? Let’s take a look at the options.
Banks or credit unions
If you plan on getting a loan through a bank or credit union, you can get pre-approval (as we mentioned before) saving yourself some time when finalizing the sale. While it takes a bit more time on your part, you can be sure that you’re doing your due diligence and getting the rate that’s perfect for you and your specific needs. It’s also a great option if you’re buying privately.
Through a dealership
Loans through a dealership work the same way as bank or credit union loans do, the only difference is the dealer works on your behalf. They submit your application to different lenders to try and get you the best deal. While it saves you time and energy, you don’t have as much control over the process as if you were doing it yourself.
Online
Especially if you have a low credit score, online companies like Canada Drives can be a great option to help get financing. Complete an application, and quickly and easily get connected with dealer partners who can work with your terms to get you into a vehicle – on budget.
And there you have it — the complete comprehensive guide to financing a used car in Canada. Remember, the most important thing in this whole process is to make sure you’re equipped with all (and we mean ALL) of the information you need so you can be sure you’ve made the right decision all around. Good luck!
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