How to Finance a Car – Useful Tips Making You the Happiest Car Owner

A car is potentially one of the biggest purchases you’ll ever make. The day you get behind the wheel of your very first car marks as a great moment to remember forever.

However, getting a car is not all just fun and games. As all big purchases, it involves a lot of planning ahead, familiarizing yourself with different options, but moreover, acknowledging your very own financial capabilities.

You don’t want your special day to be followed by six miserable years trying to pay back far too expensive a car loan? Fear not – we are here to present you with the basic car financing options as well as their possibilities and threats.

Option 1: Paying for a Car with Cash or Savings
Option 2: Financing a Car with a Loan
Option 3: Financing a Car with a Lease



Option 1: Paying for a Car with Cash or Savings

If you want to decrease your car financing costs to a minimum, it is best to pay for the car in full. This way you are only paying for the vehicle itself and you avoid paying interest and other additional loan costs.

This is oftentimes easier said than done, unless you have been saving money for years or you have received an inheritance. But if you are in no hurry to get a car right now, you can save some money and pay even part of the car in cash.

Get acquainted with more reasons to buy a car in cash here. 

Dos and Don’ts for Paying a Car in Cash:

DO favor a large down payment, even if you can’t buy the car completely with your savings. This reduces the loan amount needed, which in turn reduces the credit costs.

DO budget your car purchase carefully in advance.

DO consider paying some of the car on credit card to gain purchase protection. However, do check whether this is acceptable and free of charge by the car dealer.

DO try to negotiate the price with the dealer. When you are actually holding the money, you have more room to talk the price down a bit.

DON’T use all your savings on the car. Make sure you have savings for a rainy day left.


Option 2: Financing a Car with a Loan

Auto loans are popular as ever: According to a research made by the Federal Reserve Bank of New York, 43 % of the adult population in the United States had a car debt in 2017.

A loan should obviously be considered an option if you need a car on a tight schedule and you do not have enough savings at hand. Especially a very low APR might turn out to be a fairly good deal giving your personal finances some leverage.

Dos and Don’ts for Financing a Car with a Loan:

DO carefully consider that these three factors are in line: the loan amount, the APR and the loan term.

DO compare different loan options from different loan providers.

DO know your credit score. The higher the credit score, the easier it is for you to get a loan with good terms.

DO make sure that you are able to cope with the monthly costs for the entire loan term. Check out a cost calculator here.

DO prefer a loan with no prepayment penalty in case you want to refinance the car loan or pay off the loan early.

DO notice that you do not own the car before you have paid the loan completely. This can turn out to be problematic if you are looking to sell your car before it is fully paid back.

DON’T get too excited about zero percentage offers. In these cases, the offers are compensated by pricing the car price higher.

DON’T just focus on the APR while comparing loans: always consider the overall costs (all credit + vehicle costs).

DON’T forget the down payment, which can be 10 to 20 percent.


Option 3: Financing a Car with a Lease

Sure, you need car. But do you need to own it?  Do you get bored easily and hope for a new car every other birthday? Or maybe you need a car for just a limited period of time? If you answered yes, leasing might be an option for you.

When you lease a car, you usually pay monthly fees, just like you would while financing a car with a loan., except for a much lower cost. You also do not need to pay for any servicing or maintenance costs.

However, the car will never become yours. You will just return it to the dealer and you will not get any returns on it.

Dos and Don’ts for Financing a Car with a Lease:

DO prepare yourself to negotiate the leasing fees. Many car dealers value the car’s residual value to be higher than it will be, which reflects as higher monthly fees.

DO know your miles. Leases have annual allotments limited to 10,000-15,000 miles a year. If you drive more than that, leasing will become quite costly due to extra charges.

DO take good care of the car. Extra damages mean extra costs.

DO remember that lease payments are tax deductible if you use your car for business more than 50 percent of the time.

DON’T lease, unless you’re sure about the leasing period. Ending the agreement early is not easy or cheap.

DON’T get too attached to the car. Using an option to purchase the car with a lease payout is not the most affordable way to go.



Now What?

So now you know of the three basic auto financing options. Whatever you choose to do, always:

  • Keep track of your personal finances. You need to know how much you can pay or save for a car.
  • Know your needs: What kind of car do you need, how much do you drive etc.
  • Gather information. Compare cars and offers, learn the language of the car dealers. You need to know the ideal specs before even walking in to a car dealership.
  • Negotiate. You might be able to make a great deal.