Tips to Finance a Car Smartly

Yes, you want a new car but you should never get lost in that desire. You can finance a car smartly, and you should. Don’t fall prey to dealerships who make their profits by taking advantage of naïve consumers. No, the MSRP isn’t what the dealer paid for the car. No, you really don’t need all those add-ons. No, you should never refinance your trade-in vehicle into the new car contract. All of these traps will get you into trouble and increase the amount of your new car purchase. Rather, rise above them and walk in with the confidence you need to finance your new vehicle purchase in your favor.

Know Your Credit

Car dealerships are known for lowering your credit score to boost the interest rate they can charge on the financing, so run your credit reports first and take a good look at them. If your score isn’t stellar, keep reading because there’s more on that below. Either way, take the credit reports with you when you car shop. Once you find the car you want to purchase and ask for the invoice price so you can negotiate off that rather than the MSRP, let the dealer run your credit and see what the finance manager says. If he or she says your score is lower than it should be, whip out the reports.

Look Into Financing Prior to Your Shopping Spree

If your credit isn’t as good as it should be, or really either way, research financing before you go car shopping. You may find a lender who will pre-approve you and offer better rates than you can get at the dealer. If you have bad credit, pre-approval may be crucial to getting into a new or used car. If you walk onto the lot with your financing in place, the dealer will work with you regardless of your credit score. Shop for financing before you car shop. This gives you a simple car loan application process and lets you know what you can really afford so you don’t end up upside-down in your car loan.

Short-term Is Always Better

You might be tempted to get a long-term car loan to reduce your monthly payments and get you into a new car rather than a used one but don’t – just don’t. Why? Do the math. Imagine you buy a new car for $25,000 and finance it over 5 years. The interest rate is 4 percent. Your monthly car payments will be $460, and you will have paid $27,625 for the car once it’s paid off. You’ve just spent $2,625 more on the car. If you finance a $10,000 used car over two months at the same interest rate, your payments will be $434 each month and you will only pay an additional $422 in interest. Wow. Just wow.

Put Down at Least 20 Percent

The other factor in the basic financial recap above is down payment. The more money you can put down on your new or used vehicle, the less money financed. Financial experts agree that you should put at least 20 percent down on your car purchase, so shoot for that. If you can afford to put more down, however, you should. The less you have to finance and pay off, the less interest you will pay once you have the pink slip in your hot, little hands. Save for a down payment before you shop and make certain it’s at least 20 percent of the vehicle price.

Pay for Extras With Cash

Here’s another trick dealers love to use: They finance any extras, their fees, and vehicle taxes. Don’t let them do this, as this will increase the vehicle contract total and the interest you pay on the car or truck. Set aside enough money to pay for the fees and taxes in cash. Pay for all extras, i.e. extended warranty, upholstery and paint protection, service agreements, etc. with cash, as well. Don’t let the dealer finance anything other than the vehicle price after your down payment. This will keep the financed amount down and you in a better position to pay the vehicle off without issue.

Who would’ve thought buying a car could be so complicated. This is why car dealerships and their sales personnel tend to have a bad reputation. Perhaps the best tip is to shop at a dealer you trust. Make certain it is reliable and has excellent consumer feedback.

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