Financing a Car – All You Need to Know
Car financing is common. But you need to think of it as its own separate purchase and one that has its own cost. That’s why like with every other purchase, you need to approach it carefully. Let’s understand how it works.
When you finance a car, a financial institution loans you the money for it. You then pay the lender the money back with interest and any fees that may charge for letting you borrow the money. You can borrow the money from banks, credit unions, online lenders, finance companies, and even car dealerships. The cheapest options for borrowing money are often credit unions or banks. Dealerships are usually the most expensive. So shop around for a car loan and try and preapproved. When you do get the loan, you will start paying it back every month. This monthly payment includes the principal payment and the interest for borrowing the money.
What you need to borrow money is a healthy credit score. A good idea would be to build your credit before you apply for a car loan. If you can wait, you should definitely do this. Make all payments on time, check your credit report once a year, and try to keep it in the excellent range. If your credit score is excellent, you’ll have to pay less interest on your car loan. If your credit score is poor, your car loan will be that much more expensive. People with credit scores over 780 often get an average interest rate of 4.01%, while people with scores of 500 or less pay 143%. This means if you got a five-year car loan of $20,000, with 14.3% interest, you’d end up paying over $28,000 in return. Imagine all that you could do with that $8,000 instead.
So the question is, should you take out a car loan? This depends entirely on your financial situation. The best thing to do is pay cash to avoid paying interest and any loan feed. But you shouldn’t drain your savings to buy a car. You may need the cash for emergencies. If you absolutely need a car, and can’t pay cash, then you have no choice.
