Whether you are looking to buy the car of your dreams or just need a set of wheels to get you from Point A to Point B, the fact is that you need a car just to make it in today’s world. And, the sooner the better! The question is: how will you afford it?
When it comes to car financing, you basically have three choices: you can pay in 100% in cash, you can apply for financing from a credit union or bank, or you can acquire your car financing through the dealer from whom you will buy your car.
The Car Financing Trade-Off
When making any financial decision, it is important to consider all aspects of your decision. Thousands of automobile financing transactions happen every day. Money is changing hands as people or car dealers sell cars to buyers.
Obviously, having cash in hand when buying your new or used car is the best-possible situation. But, when you enter into a car financing agreement, you are doing what finance experts call “leveraging.” You see, taking out a loan means that you are getting something you want now (i.e., your car) in exchange for agreeing to pay more money over time in the form of interest. This is a trade-off: you save money now but have to pay more later.
Car Financing Fine Points
As you consider a car financing agreement, it is important to know the finer points of your decision. These are the things that you need to consider carefully before signing on the dotted line:
1. Payback period: Car loans are measured in terms of number of months, also called the payback period. For example, a 3-year loan is a 36-month loan. Most loans are 4-6 years. The longer your payback period, the more you will have to pay in interest over the life of your loan. The shorter your payback period, the lower your monthly payments will be.
2. The total amount borrowed: The more money you can put up as a down payment, the lower the total amount borrowed will be. Of course, the less you borrow, the less interest you have to pay and the lower your payments will be.
3. The interest rate: This one is the trickiest of them all, especially for first-time borrowers. Car financing companies of course benefit from charging you a higher interest rate because they make more money off of you over the life of the loan. It goes without saying that as a buyer you would rather have a lower interest rate. There is no magic number in terms of the interest rate you should agree to pay. Rates vary depending upon a number of factors: most importantly, your credit (FICO) score and the prime interest rate.
One great piece of news about any car financing deal you secure: you can pay back your loan at any time. While it is unlikely that you will save up enough money during the life of your loan to pay it back early, this has been known to happen. And, the day you pay it back is the day you stop paying interest on that loan. Paying your loan back early, if you can swing it, is like writing yourself big fat check in saved interest.
