When buying a car, it is rare to buy it outright. Most of us require some form of financing, whether it is a loan from a bank, credit union or the dealership. In order to make sure you are getting a deal you’re comfortable with and that meets your financial goals, it’s important to know your financing options and their workings.
There are numerous financing options to choose from whether you’re buying a new car or used car. This includes financing through a car dealership, or through a bank or credit union.
The most widely used option for financing a car is an auto loan. An auto loan is a type of loan that you can get from a bank, credit union or other lender to borrow the money to buy the car. With an auto loan, you pay back the loan amount, plus interest, in monthly instalments over a specified period of time – usually between three and seven years. The interest rate will depend on your credit score, the length of term and whether the car is new or used. Generally, the shorter the term, the lower your interest rate, but the higher your monthly payments. A longer term will mean paying more interest over the life of the loan.
Before you apply for a loan, find out your credit score, as that will affect what interest rate you’re offered. In general, the higher your credit score, the lower the interest rate you’ll be offered. If your credit score is low, consider taking steps to improve it before you apply for a loan, or look for lenders who specialise in lending to borrowers with lower scores.
Another possibility: financing through a dealership, where the car dealer arranges the loan for you. This could be helpful because you can finalise the purchase at the dealership. But it’s still worthwhile to compare the rates and terms of the dealer’s loan with those available through a bank or credit union. Dealerships sometimes offer promotional financing for new vehicles, such as 0 per cent APR for a limited time. These deals are typically limited to buyers with the highest credit scores. Carefully read the fine print and make sure you understand the terms of a promotional loan.
If you want to minimise your monthly payments, you might be tempted by a lease. When you lease a vehicle, you’re essentially renting it for a fixed period of time, often two to four years. At the end of the term, you can return it or buy it out. You’ll typically pay less with a lease than with a loan because you’re paying only for the car’s depreciation over the lease term, rather than for the full value. But leases come with restrictions, such as mileage caps, and you’ll end up without the car.
A big down payment can also help to reduce the amount you borrow, thus lowering your monthly payments and the total amount of interest you’ll pay over the life of the loan. Ideally, you should put down at least 20 per cent of the car’s purchase price, if you are buying new, because it can help to offset depreciation.
Finally, when you are ready to buy, do some comparison shopping on financing before you sign on the dotted line. Getting your financing pre-approved can help you decide how much you want to spend and might give you some leverage when negotiating the final terms of your deal.
