The Best Car Credit Finance Options

November 13, 2013

A comparison of leasing vs. financing cars, and the pros and cons of dealership vs. online car credit finance.

Car credit finance allows you to purchase a new or used car without having the entire purchase price on hand, making it easier for you to drive away in the car you want. You have some options when financing a car, purchase or lease, dealership or online finance. Auto loans can be tricky sometimes, due to the jargon and the pressure you may feel to go along with whatever the salesman or loan agent says. Always know that you have negotiating power and that you should never let yourself be taken advantage of. It is true, if you have bad credit or no credit, you lose some of your ability to negotiate better loan rates or purchase amounts, but you have the right to look after your best interest.

Purchase
Purchase involves filling out a car finance application and the structuring of an auto loan according to your credit score and ability to pay it back. You have to decide how long you want the loan to last—usually either 36 or 60 months. The longer you take to pay it back, the lower your monthly payment will be but the more interest you will be charged. You will be asked to make a down payment. If purchase is your ultimate aim, paying a larger down payment is better. It means lower payments and less interest over time. When the loan is paid off, you own the car.

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Lease
Leasing a car is sort of like renting it. You will also have to fill out a credit application, but the payments will be structured not to purchase the car, rather to pay on the loan you receive for a specific amount of time. Upon expiration, you have the option of purchasing the car for the residual price which will be a term of the original contract. You can also choose to trade the car back in, but if you have gone over the allotted mileage for the lease or the car exhibits excessive wear and tear, you may have to pay a fee. If you want to frequently upgrade your vehicle, and ownership is not a priority, this is a good option.

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Dealership Financing
Most car manufacturers offer financial services to help customers make car purchases and finance all in the same place. This saves you time, but for this service you may be charged a higher interest rate than you would elsewhere. When you visit a car lot, you will be able to pick out the car you like then go directly to the financing agent on site and fill out the credit application. Whether you lease or purchase will then be up to you, and will depend on your credit score and your down payment. If, for instance, you have great credit but not a lot for a down payment, leasing is recommended.

Dealerships will try to talk you into financing your car through their lenders, and while this is convenient, it's not always the smartest thing to do. Most times the finance managers are really commissioned employees themselves. The higher the rate and the more extra stuff they throw in the financing terms, the more money they take home with them.

The goal of car finance though is to find the best rate for your new car. It's wise to pick out the car you want, then leave the dealership and go back another time to purchase. This will give you time to arrange for other financing. Don't worry if they try to pressure you in to taking a deal right then and there, that deal will still be available for you the next time you go in.

Online Financing
Online financing is the newest way to finance a car. The steps are quite easy. You find an online lender, fill out the free application, and then you receive several quotes from different lenders willing to make you a loan. Upon final approval you get an interest rate and a loan amount and can take that information to the car dealer to make your purchase. The advantage to this method is that you are working with a third party and thus are not pressured to make a purchase by the same party loaning you money.

Existing Relationships
Check with your bank or credit union to see if they have any special offers on car financing for you. Chances are if you have a good customer history with them, they can offer you financing at a decent rate. You can potentially save hundreds of dollars by getting a better rate through your own bank versus going through the dealership lenders.

Vehicle Value
The type of car you decide to purchase will have a lot to do with the financing options available for you as well. The more the car is worth, the higher the loan will be. Having a high rate on an inexpensive car isn't a good thing, but many lenders will try this anyhow. Before you choose a lender, understand just how much you will be paying in interest over the term of the loan.

Loan Terms
If you decide to finance the car for a longer period of time, the rate may be higher as it's considered riskier for the lender. Keep this in mind when you are shopping for new car finance rates. One lender may offer you a lower rate than others, but if the loan is for a longer period of time you may actually end up paying more for the car. When you are comparing rates, make sure the length and other terms of the loan match so you can get a more accurate picture of your overall costs.

Credit Score
Your credit score is your ticket to the loan. This judges your creditworthiness and credit risk to the lender. You want to maintain a score of at least 720 to 750 to get a very good rate. For those individuals whose credit score falls below 620, it becomes more difficult to qualify for the better quality loans.

Understand Interest Rates
You need to walk into the dealer's showroom with an understanding of current interest rates for auto loans. Go online or ask the dealer before sitting down for information about the loan rates and terms they have available. This information should be for both their new and used car fleets.

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