A Beginner’s Guide to Car Finance and Loans

Commuting long distances has become the norm in this day and age. Consequently, cars have become a necessity for many. People often believe they have to wait until they have adequate cash, but not having funds upfront does not mean you cannot buy a car earlier. Fortunately, several finance and loan options can suit your needs allowing you to park the vehicle of your dreams in your garage. Let’s walk you through car finance and loan options. Also, other collaterals are possible. Here you can find e.g. more on cross collateral loans.

1.   Personal Loans and Title Loans

The two most common financing options are personal and title loans. Personal loans allow you to borrow a large sum of money unsecured, meaning you do not have to pledge an asset to borrow the money. However, a good credit score is the key eligibility factor for getting a personal loan to make your car’s upfront payment. You may then pay your lender back in chunks over a predetermined time frame.

In contrast, title loans are secured, mandating you to put an asset, such as a car or a house, as collateral to borrow the money.  You may apply for auto title loans if you have a bad credit score and need cash quickly.

2.   Dealer Financing

Dealers often offer two  types of financing options to car buyers. A Personal Contract Purchase (PCP) is a long-term agreement lasting three to five years, allowing you to use the car until the contract ends. Initially, you must make a small upfront payment, typically 10% of the vehicle’s value, and then make payments for the duration of the contract. Once the contract is up, you may either make the final payment and keep the car or return the vehicle.

The Hire Purchase agreement binds you to pay an initial deposit and the rest of the vehicle’s value in monthly payments which may be higher than PCP. However, at the end of the agreement, you have full ownership of the car.

3.   Credit Card

You can also use your credit card to purchase a vehicle, but know that many dealers do not accept card payments and prefer cash, checks, or bank transfers instead. This is because dealers may have to pay a credit card processing fee when receiving a credit card payment, typically costing them 3.5% of the transaction amount.

Some credit cards offer you reward points upon making big payments, such as buying a car, which can quickly add up to big payoffs. In addition, credit card offers such as 0% interest stretching up to 18 months can make it easier to pay off your loan within that time frame. So you must consider using your credit card after gathering adequate information on the offers.

Loan Qualification

Ensure that you have a credit score of at least 670 so that lenders may offer you loans with lower interest rates. Secondly, your DTI (debt-to-income) ratio, denoting your monthly income toward paying debts, should be less than 50%. A lower percentage ensures lenders that you can manage to pay back the money you are borrowing.

Endnote

There are a number of car financing schemes out there, but you must weigh the pros and cons of each to choose the one that best fits your needs to use smart money. When making a loan agreement, consider not going over five years to repay the money. While longer duration means smaller monthly installments, it also means high-interest rates. You do not want to be in debt for long, so try to create a personal financial forecast to be aware of what amount you can pay monthly and then sign up for a finance scheme that falls in that spectrum.