A new vehicle purchase is among the biggest investments you will make in your life, and the process for financing this purchase can overwhelm even an experienced car buyer. Though some people choose to pay in cash, you don’t have to empty your pockets all at once just to get yourself on the road. Financing allows you to get the car you want by spreading out the cost into reasonable payments.
When you understand what your options are to buy your next vehicle, you can make a more informed decision. Here is what you need to know about the most common car financing alternatives.
Direct Financing
When you use direct lending, you receive a loan from a bank, credit union, or financing company. You will pay a finance charge, determined by an interest rate, over the course of the loan. How that interest rate is determined will depend on your current financial circumstances, including your income and credit score.
Some people choose to finance through a bank or credit union because they have an existing relationship with that institution. Others use a financing company that specializes in auto loans, like AS Financiering. These companies have expertise in auto loans and may have additional services to offer.
With direct lending, you will know what your credit terms are upfront, including the maximum amount you can afford to borrow, the interest rate, and the length of the loan. This will allow you to make better decisions about the right car for you. Pre-approval allows you to save time at the dealership and provides leverage in your negotiations.
Dealer Lending
The dealership may also offer to finance your purchase. Similar to direct lending, you will pay interest over the length of the loan. Typically, the dealer will use a bank to handle the loan and collect payments.
Dealerships usually prefer that you finance through them, so they sometimes offer savings programs or other incentives that could save you money. However, because they do profit off the loan contract, the dealer may not offer you the best terms that are available.
If you are considering financing through a dealership, you may want to shop around for interest rates first. This pre-approval could help you negotiate a better rate when you are at the dealership.
Leasing
Leasing, unlike the other alternatives, does not actually allow you to purchase a vehicle. Instead, you are paying to rent a car that you return at the end of the lease period. These contracts have a limit on the annual miles, typically 15,000, that you can drive before you are charged for extra mileage. There are usually additional fees associated with excessive damage, early termination, and service requirements.
A lease will usually cost less than financing a vehicle, allow you to afford a more expensive car. In some cases, you may also avoid costly maintenance. However, if you are considering leasing, you should carefully analyze the amount of driving you do. Fees and upcharges can quickly rack up, making this alternative unaffordable for some drivers.
When you are ready to make your next vehicle purchase, make sure to go into the process as informed as possible. Start by evaluating your economic circumstances. This includes looking at your credit score and your budget to determine how much car you can actually afford. You will also want to consider your driving needs and habits. Then, shop around for the best rates so you can show up to the dealership ready to negotiate. Understanding the financing options available to you will help you get the best deal on your new car.
