4 Considerations to Make Before Financing Your Car

Buying your first car is a scary thing, actually buying any car is scary regardless of what number it is. Dealerships and lenders can also use jargon that you don't know. Consider these 4 factors before financing your car to make sure you get a good deal on a vehicle that meets your needs.

Know How Much Money You Can Spend

As a recent retiree or if your career is coming to an end, you probably have a lot of money for a down payment but don’t want to put your lifestyle at risk. That means you'll have the money for the down payment while leaving your investments in tact.

It's essential that you make a budget that tells you exactly how much money you can afford to spend on your vehicle. A good budget will include expenses and savings. Some items to put in your budget include your: 

• rent or mortgage payment 
• auto insurance 
• health insurance 
• food 
• entertainment 

You should also set aside at least ten percent of your earnings for retirement savings.

Once you have made your budget, you should know how much room you have for your monthly car payment. Don't exceed this amount. If you do, you'll have to reduce your spending in another area. That can make life difficult and less enjoyable.

Understand How Interest Increases Your Overall Car Payment

If you don't have an extensive credit history, then you might only qualify for a sub-prime loan. That means you'll pay higher interest than someone with a good credit score. This should influence how you see car prices.

Let's say you don't want to spend more than $15,000 on your car. If you qualify for a 5 percent loan with five-year term, then you should include the interest when comparing prices. A car priced at $15,000 will actually cost you close to $17,000 after you calculate interest.

That means you should look at cars with lower sticker prices or find a better interest rate. If you buy a car worth $13,500 with 4 percent interest, then you will spend a little under $15,000 over five years.

Explore Your Financing Options

Just because one dealership wants to give you a sub-prime loan doesn't mean that you can't get a better deal elsewhere. Your education and income prospects could qualify you for Lexus financing with an excellent interest rate. Then you can buy the car of your dreams without going over your budget.

Think About How Long You Plan to Keep the Car

$15,000 might fit into your five-year budget, but what if you plan to drive the car longer than that? Even pre-owned cars should last longer than five years.

Some people decide to budget more money to their car purchases because they know that they will eventually pay off the loan. If you drive the car for 10 years, then you could probably afford to spend $20,000 instead of $15,000.

If you know that you'll want to buy another car in five years, though, you should stick to what you know you can afford during the foreseeable future.

What other factors should buyers consider when they look into their financing options?

4 Things You Should Consider Before Financing a Car

Good auto financing options differ from person to person. Not only do these options depend on your own financial situation and credit score, but they also are determined by the age of the car that you're looking to finance and the financial institution itself. Before you buy your next car, consider how these factors will impact your financing.

How Much Can You Afford to Pay Each Month?

Financing a car means you'll have monthly payments. Make sure you choose a car and financing option that fits into your budget. Do you think you can afford $500 a month, or is $300 closer to your range? The amount that you can afford will influence the kind of car that you buy, but almost anyone can find an affordable option. Also, keep in mind that most financial institutions won't grant an auto loan for less than $5000. 

How Large is Your Down Payment?

The more you can spend on a down payment now, the less money you have to borrow to purchase the car. That means paying more now could equal smaller monthly payments, which can come in handy during rough times.

Most lenders and finance offices will also give you better interest rates when you put down a significant amount of money. Someone with a $1,000 down payment might pay five percent interest. With a $5,000 down payment, that same person might pay closer to four percent. That single percentage point can add up to big savings over a few years.

Lower interest is attractive, but you shouldn't spend your entire savings on a down payment. What would you do if you lost your job or had unexpected expenses that made it difficult for you to repay the loan? A couple thousand dollars in savings could get you out of a difficult situation.

How Healthy is Your Credit?

Your credit rating will have a big impact on your finance options, so you should get a copy of your credit report before you start looking for a new car. If you have excellent credit, then you can expect lenders and dealerships to give you lower interest rates. That excellent score makes you an attractive customer, so they're willing to give you competitive rates.

If you have mediocre or bad credit, then you can expect to pay higher interest rates. That doesn't mean it's impossible to get financing. You can still get a bad credit auto loan, but it will cost a little more. 

How Long Will You Keep the Car?

Most people forget to think about how long they actually want their cars, but that's an important consideration when you plan to finance the vehicle. If you plan to drive the car for ten years, then you can probably live with a four-year loan. Then you'll have six years of payment-free driving.

If you only plan to drive the car for a couple years, though, you don't want a four-year loan. Then you'll have to worry about repaying the loan's balance before selling it for a new vehicle. Instead, you'll want to choose a shorter-term lease that helps you pay for the car quickly.

What other things do you think people should consider before financing a car? Have you ever found out too late that you made a mistake when getting a loan?