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How to finance a car in 6 easy steps

A new-car purchase can be a big investment, and you will likely require some help when it comes to funding. Financing will provide the cash you need to make the transaction. Financing is a big commitment. You’re entering into a relationship with a lender that could last several years. Things are more likely to work out in your favour if you take the time to investigate the situation so you know what you’re getting into before signing on the dotted line. You can save money by making smart and informed choices. Here are six essential steps to follow when financing a vehicle:

  1. Set financial boundaries
Boundaries are important. They set limits that prevent us from incurring undesirable consequences. When financing a car, it’s important to know what your boundaries are when it comes to how much you are able to spend each month on your car payment. Take a firm look at your income and your various monthly expenses. Having a top-trim car with all the options is nice, but you’ll likely be willing to make some compromises in this area if you realize that spending big on your vehicle purchase will force you to make sacrifices elsewhere in your budget. For example, are you willing to give up a weekly film night with your friends just so you can have a premium sound system in your new ride? When mapping out your monthly car expenses, be sure to consider all expenses associated with a vehicle and not just the car payment. You’ll have to pay for things such as petrol, car insurance, and maintenance. Make sure all these costs are reflected in your budget. Once you’ve established an amount you’re able to afford each month for a car payment, adhere to it. Don’t allow yourself to be swayed by sexy options once you’re in the showroom. Your bank account will thank you for sticking to your guns 2.Understanding the basics It’s important to understand what you’re getting into when you secure financing. A car loan has two elements: principal and interest. The principal is the amount you are borrowing, and the interest is the amount you are agreeing to pay the lender in exchange for being given the loan. With a car loan, you’re agreeing to make monthly payments over a set period of time that cover both the principal and the interest. It can be tempting to choose a loan with the longest term possible since these loans tend to come with smallest monthly payments. Keep in mind, though, that the longer the loan term, the more money you will pay in interest expense. If you get a loan and find you’re able to make more than the minimum payment that’s required each month, it’s a good idea to accelerate your payoff in this way. This will save you money in interest expense over the life of the loan.
  1. Know your credit score and take steps to improve it
Obtain your credit score, and get a copy of your credit report. The terms of your car loan will depend on your credit score, and if your score is low, you’ll be charged higher interest rates for your car loan. To qualify for the best rates, do what you can to clean up your credit before seeking a car loan. Minimize outstanding credit card debt as best you can. Some of your credit score is attributable to how much debt you owe and how much of your available credit you use. If you have credit cards that are near the maximum, take steps to reduce the balance owed if you want to improve your credit.
  1. Choose a financing option
You have two choices when it comes to financing your car: You can finance with a direct lender or you can obtain dealership financing. Direct lender: Financing with a direct lender entails securing your loan directly with a bank, or finance company. The biggest benefit to taking this route is that it gives you the chance to compare rates among various lenders. By doing so, you’ll be able to obtain the most favourable rates for your car loan. Financing with a direct lender also allows you to enter into the car-shopping process with the peace of mind that comes with knowing you have a loan in place. This will make the final leg of your car-purchase transaction a lot less stressful. Dealership financing: With dealership financing, you secure financing with the help of the dealership that’s selling you your new car. The dealership may finance your loan directly or may choose to obtain financing with an affiliate lender. This approach affords you a certain measure of convenience since it allows you to purchase your car and get financing at the same location. However, the big drawback associated with dealership financing is that it robs you of the ability to shop around for the best rates. By getting a loan with a dealer, you are limiting yourself to financing your purchase at the rates the dealer is willing to provide. This could cost you money in inflated interest payments over the life of your loan. 5. Paying a deposit In certain situations, you won’t be required to pay a deposit when securing a car loan, and this option will almost certainly be presented to you if you have excellent credit. However, putting some cash down is a good idea, as it will save you money in interest expense over the life of the loan. Also, if you need to sell your car before the loan is paid off, a deposit will help you avoid a situation in which you owe more on the loan than the car is worth. Remember, the more principal you finance, the more interest expense you will owe. When deciding how much to put down, a good figure to aim for is 20 percent of the total purchase price. 6. Pay cash for taxes, fees, and other extras When purchasing a car, you’ll have to pay for items such as road fund, and registration fees. It can be tempting to roll these expenses into your loan, but doing so isn’t the best approach to take financially. These items will inflate the size of your loan, and this will cause your interest expense to increase. The most prudent approach to take is to pay for these expenses up front if you can..

Plan ahead to secure the most favourable outcome

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