For more than just a few reasons, one of the soundest life decisions you can make is to buy a car. It can make your life easier and more convenient in many ways, like saving time from your daily commute while enhancing your personal privacy. Those trips to the shopping mall become easier and when you decide to make a quick trip to a nearby state, it saves you from a great deal of hustle. However, not many people can afford to buy new wheels in cash at one go, which makes auto financing the best option for most car buyers. Whether you’re looking for a new car or a used car that caught your eye somewhere, there are many car financing options out there, and picking the right one for your needs is important.
The following pointers cover pretty much all you need to know about car financing.
Major Financing Options
When looking for car financing, you have two main options. You can either get financing through a dealership or through third-party sources such as banks and other lenders. Each of these has its own merits and demerits, which makes it important to pick the financing option that will best suit your needs and capabilities.
This is perhaps the most popular car finance option. As the name suggests, you get financing through your car dealership. This option provides you with several financing plans to choose from depending on your preferences and several other factors. The 3 main dealership financing options include:
- Personal Contract Purchases
- Personal Leasing
- Hire Purchases
Personal Contract Purchases:
When financing through a personal contract purchase (PCP), you’ll usually be required to make two lump-sum payments, one at the beginning of the agreement and one at the end. In between these two payments, you’ll pay several monthly installments over the contract’s duration until your vehicle is fully paid. The car only becomes fully yours after you’re through making the payments, which are finalized by the second lump sum or “balloon” payment.
Kaspar from MoneyExpert.com says that most dealerships give you the option of returning the car after the monthly installments, and you can even end the contract early as long as you’ve repaid more than 50% of the agreed amount. Early termination of the contract will not necessarily impact your credit score, even though it may appear on your credit report. After you’ve cleared the installment payments, you can also sell the car and pay the remaining (balloon payment) amount without much of an issue.
This plan is similar to PCP, in that you’ll be required to make a lump sum deposit, followed by monthly payments. The only difference is that at the end of the lease, you don’t buy the vehicle. With personal car leasing, you can return your vehicle for another one at the end of the lease. The costs of this option are largely determined by the duration of the lease as well as the limits you agree to with your provider or dealership. Also, it’s important to note that at the beginning of the personal lease, most dealerships will ask for at least 3 times the amount of your monthly installments.
Just like PCP and personal leasing, you only own the car after you’ve fully paid the agreed amount under a hire purchase contract. This prohibits you from selling the car before you finish your payments. At the beginning of the contract, many dealers will ask for a lump sum down payment, which is typically 10% give or take, of the sticker price plus the predetermined interests.
Independent financing is also an option for car buyers who are unable to buy new wheels with cash. The word independent simply means that the dealership you’re buying from has nothing to do with your financing plan. Their main concern is giving you the vehicle along with things such as warranties and you’re all done after the transaction is completed. Some of the most common independent financing options include the following:
Credit Card Purchase:
Depending on the dealership you’re buying from; you could also use your credit card to purchase your new vehicle. However, your credit card will have to be really loaded with a giant limit since cars don’t usually come cheap, not forgetting that not all dealers may accept credit card payments. Additionally, the costs tend to be much higher since you’ll have to pay back the money based on your credit card interest rates.
Some lenders call them car loans or auto loans, but these are simply loans you get from a lending institution to fund a big project such as buying a car. To qualify for a personal loan with most banks, you will need to have a superior credit score.
You could also raise the funds to buy your new automobile by tapping into your home equity, precisely if you have an existing mortgage. All you need to do is approach your lender and ask for the amount you need for the purchase, which is then added to your mortgage. One downside to this option is that it increases your financial burden, considering you already have existing financial commitments. It also increases the cost of your mortgage in case you still have a long way to go to clear your home loan.
In addition to the above, refinancing your car loan could also be an option. But let’s leave auto refinancing one for another day. With the above in mind, car financing should no longer be a matter to scratch your head over.