Are you planning to buy your first car this year?
Car sales in the United States are rising despite the health crisis. Even so, buying your first vehicle remains a huge financial challenge.
Thankfully, you can always turn to vehicle finance to get your first car. Continue reading below for a breakdown of vehicle financing and how it can help you:
What is Vehicle Financing?
Vehicle finance, car finance, or auto finance refers to a group of financial products to help people in buying a car. These products offer financially manageable alternatives to traditional, full-cash payments.
Car financing typically involves monthly repayments. A bank or a lending institution provisions car finance. They allow the buyer to pay the seller through loans.
Sometimes, the car dealership offers car financing plans. Let’s examine the most common types of vehicle financing options below.
Vehicle Finance Through the Dealership
If you’re buying a used or brand new vehicle from a car dealership, they may offer financing options. In this case, you’ll enter a binding contract with the dealership. The contract’s terms say once you buy their vehicle, you agree to pay a specific financed amount and other financing charges.
Dealership financing is attractive for many car buyers. Its primary benefit is financial convenience. After choosing the car you want, you don’t need to go anywhere else to close the deal.
Another advantage is their connections with leading banks and financing entities. It gives consumers more car financing options. They can offer special programs like lower interest rates.
if you’re planning to buy a Ford vehicle, it’s best to get Ford Credit financing. Visit hsmillingtonford.com for more details.
Through Direct Lending
Another popular car financing option is direct lending. It’s securing a personal loan from a lender. The lender can be a bank, a credit union, or a finance company.
The lender grants you a loan, which you agree to pay back over a specific period. Moreover, the payments come with interest and finance charges. After getting your loaned funds, you will use them to pay for the vehicle.
The good thing about this is you already know what the credit terms are before sign the loan agreement. This way, you can make better decisions when shopping for a vehicle.
Remember not to secure a personal loan against your home. If you do, you’re putting your home at risk in case you stop fulfilling your monthly repayments.
The Credit Score Conundrum
A crucial element that determines whether a lender grants your loan application is your credit score. It’s also the main reason Americans experience loan application rejections.
To get the lowest possible rates, your credit score should be exceptional. Lenders check your current credit score while applying for a loan. It helps them evaluate your financial capability to settle the repayments.
Lenders calculate the credit scores using key factors. These include your payment history, credit limit use, and the length of your credit history. They also consider your credit mix and your new credit applications.
An excellent credit score means higher chances of loan approval. On the flip side, a bad credit rating or having none will equate to rejection.
Ideally, a minimum credit score of 661 is optimal for a conventional car loan. Going higher than this number gives you even better interest rates.
Some lenders allow you to get loans despite bad credit scores. However, they’re likely to charge excessive rates. Avoid these since they’ll likely drive you to a bad financial situation.
Minding the Interest Rates
Another key factor to consider is the interest rate based on your credit score. For new cars, the average loan rate during the first quarter of 2021 stood at 4.12%. Meanwhile, the interest rate for used car loans was 8.70%.
The rates depend on several factors. If you have a stellar credit rating between 781 and 850, you get a 2.41% loan rate for a new car. Meanwhile, credit scores between 661 and 780 get an average loan rate of 3.54%.
People with credit scores between 601 and 660 get a 6.64% average loan rate. If your credit score is below the minimum, put your loan application on hold.
Preparing for a Car Loan Application
Applying for a vehicle financing plan involves preparation. Revisit your credit score and see if it needs improvements.
We mentioned before how securing the best rates needs higher credit scores. If you fall under the 661 minimum, work on improving your credit score before applying for a car loan. Pay your outstanding debts as quickly as possible.
Pay your credit card bills on time. Avoid any credit applications and focus on settling all your debts.
Research the different auto loans available. Find the options for your financial capabilities. Read different customer reviews of auto loan lenders.
Take note of their issues with the lenders. Find a lender with a Better Business Bureau (BBB) recognition. A BBB rating reflects their reputation.
Revisit your spending habits. Develop a mindset of saving money as often as you can. Come up with a saving plan to will follow while building your credit score.
The more money you save, the faster you’ll finish your auto loan. Moreover, you will have extra funds in case an emergency happens while paying your car loan.
Compare different car financing quotes. Talk to at least three lenders and compare their offers. Look at the annual percentage rate (APR) and the repayment terms.
Before signing anything, read the fine print. Take your time and don’t hesitate to ask questions. A reputable company will do its best to reassure you.
Become Wiser with Your Finances Today
Through vehicle finance, you can buy your first car even if you can’t pay the upfront costs. You can secure your desired vehicle without straining your finances.
However, buying a car through car financing is only one of the many strategies in finance. Boost your personal finance knowledge to get the best deals for any loan.
Are you looking for more guides? Check out our different blog posts and expand your knowledge now.