How to Finance a Car the Smart Way

Finance a Car

Whether you’re buying a brand-new model or a car that’s several years old, getting the best deal possible should be at the front of your mind. Even if you do extensive research on what a fair car price should be, you’ll still need to worry about auto financing to cover the costs.

The best option for you usually won’t be the first option offered by the car dealership. You’ll need to think about how to pay as little as possible in interest over the length of the loan while keeping your monthly payments within your budget.

Your options will vary based on the price of the car, your credit score, and how much of a down payment you can afford. More families are learning to rely on their local credit unions for car loans, thanks to the incredible service and credit unions’ rates. With some friendly advice and a customized deal from a loan officer, you can get your new or used car without overpaying.

Avoid High Interest and Fees

Banks are for-profit institutions, and publicly-held banks have an obligation to maximize profit for their shareholders. They offer low enough rates to be competitive with other banks, but may slide in hidden fees once they have you hooked. They may charge high late fees if you miss a payment, or use your poor credit as an excuse to charge you higher interest.

Even loans arranged through dealerships can have extra fees tacked on to help pad their profit margins. Instead of going with whatever dealer financing is offered to you, get a pre-approval letter in advance from another lender and give it to the dealership. They’ll contact your lender and work out the details.

Borrow from Credit Unions

Credit unions are nonprofit financial institutions that provide a wide range of services like checking accounts, personal loans, and car loans. They are the best financing option for car loans because they provide highly personalized local service and lower rates and fees than most for-profit financial institutes.

This is possible because credit unions are run by an elected board of members, and have a vested interest in serving its members. A local credit union also knows local market factors like average car costs and cost of living, so a loan officer can work with you to determine a set of terms and conditions that fits your financial situation and lifestyle.

Credit unions are often willing to work with members with imperfect credit, and can provide a path to car ownership for members with bad or no credit. Although they still have some minimum standards, they are committed to protecting members’ interests instead of their own profit margins.

Raise Your Credit Score

Depending on the type of lender you use, your credit score may significantly impact the loan rates and terms you are offered. If a lender suspects you may have a hard time paying for the car loan due to bad credit, they may decline to offer you a loan, charge you higher interest, or require a short repayment term.

Since the value of the car secures car loans, you may still be able to get a car loan even if you don’t qualify for a personal loan. If you have very poor credit, even your credit union might not be able to offer you a car loan for the amount you want.

Credit unions offer secured loans to help you rebuild your credit score. Secured loans match the amount of money in your savings account at the credit union, but can improve your credit score once you’ve paid them off. These loans are a good idea if you have little or no credit, especially for young adults.

Also make sure to look closely at your credit report for errors, even if your FICO score is high. Any errors or signs of fraudulent activity on your report could drag down your rating over time, making it harder to get loans in the future. Buying a new car is an excellent time to take a thorough look through your credit history and report any errors.

Choose a Shorter Term

New car loans are available with a wide range of loan terms, and some lenders offer terms all the way up to 84 months. However, these longer terms usually have higher interest rates, and the longer length means you’ll pay more in interest over the life of the loan even if the interest rate is the same as a shorter term.

Shorter terms have higher monthly payments, but you can get rid of the debt faster. In some cases, it may be in your best interest to choose a car with a lower purchase price in order to afford the higher monthly payments that come with a shorter loan term.

T&I Credit Union offers terms up to 84 months, but many of our customers go with shorter terms depending on the amount. Our new car loan interest rates are as low as 1.99% APR (subject to approval) for loan terms up to 60 months. Talk to a loan officer about how to get the best deal you can afford while staying within your monthly budget.

car loan

Consider a Larger Down Payment

The down payment you provide at the time of purchase determines the overall amount of the final loan, which affects the total interest you pay over time and your monthly payment amount. To keep your car as affordable as possible, consider paying the largest down payment possible, aiming for at least 20% of the sticker price.

Most cars require a down payment of at least a few thousand dollars, or an equivalent trade-in. Some dealerships will advertise cars available with no down payment required, but these may have other hidden fees or higher interest rates. Talk to your dealership and your credit union about how a higher down payment will affect your financial options.

Should I Borrow from Family or Friends?

Some car owners, especially young adults, try to borrow money from family or friends to afford their first car. While this is technically legal, it can open up various problems later, especially if the person who loaned you money suddenly needs it back quickly. Even if you sign a contract with the lender, differences in interpretation may result in a major conflict.

Instead of jeopardizing relationships, rely on financial professionals who can give you the loan you need at a fair rate. Credit unions provide personalized service and can take the time to get to know you and your needs.

Your Partner for Auto Finance

As a local Michigan financial institution, T&I Credit Union works hard for members across the Detroit metro area. We provide a range of services including checking accounts, savings accounts, personal loans, home refinancing, and much more.

Our auto loan experts can help you determine the best strategy for obtaining and paying off an auto loan. We also finance motorcycles, boats and RVs so you can enjoy adventures anywhere. Whether you’re new to car ownership or are trading in an older vehicle, contact us today at (800) 338-3908 to find out more about our free membership and car financing options.

About Marsha Smith

Marsha Smith was born and raised in Ohio, where she obtained her Bachelor of Arts in Public Affairs. She is passionate about financial literacy and helping other young people navigate student loans, car payments, and buying a home.

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