Vehicle Financing for the Clueless - Unhaggle

Posted by | March 20, 2014 | Ownership | No Comments


You’ve found the right car and you’re ready to jump ship, itching to drive it off the lot, but you’re clueless about how you should be going about financing your new purchase. Should you put down a large down payment or finance as much as you can through a loan? What is the average amount someone pays upfront? If these questions have been plaguing your mind, read on.

Why Should I Finance?


When you’re in the market to buy a car, a big question that looms is whether you should pay as much as you can upfront or finance a significant percentage of the total payment on the car. While both choices have their pros and cons, there are some things to watch out for that can make vehicle financing more attractive to you.

If you choose to go down the finance route, make sure you carry out plenty of research regarding your budget, available interest rates, ideal term lengths, etc. If you finance your car, you can invest the money you would have otherwise used on a down payment, earning extra interest. With attractive rates between 0% to 2%, financing a car is almost like paying cash, except that you would be doing it at a regular pre-fixed interval and not all at once. Unlike a lease, after you’ve made all of the payments and your term length has ended, you own the car for good.

Where Can I Find a Loan?

where can i find a loan

Once you have decided to opt in for a loan to help finance your new car, it’s time to start shopping around for loan providers and the best interest rates. Remember that the lower your term length, the higher your monthly payments, but you will pay off your loan faster and own your new car completely – similar to a mortgage on a house. However, be careful to strike a balance between your budget and the term length, as you don’t want to end up paying a monthly fee that exceeds what you had initially planned. A good rule of thumb to follow is that your monthly car payment should be no more than 20% of your disposable income.

The first place to get a quote for a car loan is naturally your dealership. Note that the better your credit rating, the higher your chance of getting low rates and better quality financing. So, be sure to get a free credit report before you head down to haggle so you know where you stand. Go through the term agreements carefully and clarify any issues with the salesman right then and there. Don’t feel pressured into signing any papers just yet, as you can still shop around for other loans and potentially get a better interest rate offered. Check with a credit union, bank or online lender, and armed with this knowledge, you will be better able to negotiate financing terms.

What About a Lease?

Do you find yourself switching cars every few years, going from a Subaru Impreza to some other sedan often? If so, leasing a car might be for you. If financing a car is like putting down a mortgage on your new home, leasing is like renting an apartment. Just like paying your rent gives you the right to live in your apartment, making regular monthly payments on your leased car gives you the right to drive it.

Furthermore, your car will always be covered under a warranty when leased, so you don’t have to dip into your pocket for fixing any mechanical problems that may occur down the road. Also, monthly lease payments are typically cheaper than monthly payments for a car that you’re buying outright. However, note that you won’t own any part of the car during this period. Leased cars also typically come with an annual mileage limit, so be sure to know your driving habits so that you don’t exceed these limits.

What is a Down Payment?

down payment

A down payment is essentially defined as the initial payment made on an item that is bought on credit, such as your new Jeep Patriot or some other SUV. Putting down money up front, even when financing your car, has several advantages. Firstly, you own some equity in your new car, which can be handy in case you need to sell it in the near future. Secondly, the larger the down payment, the less you owe in debt, resulting in lower monthly payments. The more money you pay upfront, the lower the risk of lending you money, which coupled with a good credit score, can also garner you lower interest rates from lenders.

Conventional wisdom has long held that 20% is the magic number when it comes to putting a down payment on a new car. However, an Edmunds analysis of new and used car purchases shows that the average car down payment in 2013 was about 12%. The general rule is that for every $1,000 that you put down, your monthly payment will drop by about $20.

How Do I Keep My Car Payments Low?

Worried at Computer

With rising costs of living, one is always on the lookout to save money and have lower payments. There are several factors that affect your monthly car payment and can be manipulated to receive a better financing deal:

  • Ensure you have great credit scores and avoid overextending your budget with unnecessary loans or spending on credit cards
  • Put down a larger down payment so you owe less
  • Choose a longer term length so that you can make smaller payments for a longer period of time
  • Always shop around for better rates

Ultimately, you want to balance your vehicle finance cost against a monthly payment you can afford, resulting in a good deal for both parties. Doing your research, staying strictly under a budget and having a significant down payment ready can all help towards your goal of getting a great financing agreement, while letting you drive off your new car without any worries.

Feel like we’ve missed something? Feel free to leave a comment or send us a tweet @Unhaggle.

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