What you Need to Know about Auto FinancingMar 15th, 2016
So you’ve found the car of your dreams and you’re ready to jump in the driver’s seat and take it home – but you can’t take it anywhere until you pay for it first (at least not legally!). Most people don’t have the funds to pay for their vehicles up front; they need some sort of financing. If this sounds like you, there are a couple of options available.
There are two main types of auto financing – bank loans and dealership loans. Both have advantages and disadvantages.
If you do business with a particular bank then a bank loan can offer a convenience that other options don’t. You’ve already established a relationship and this can work to your advantage.
Another advantage is that you can get pre-approved for a loan so you know exactly what your budget is for a new car. This can save you time and embarrassment, rather than going to a car dealership and being turned down because of your credit, or any other reason.
Sometimes you may get turned down by your own bank because of credit issues; you may have to shop around at several different institutions to find one that will work with you. Banks can be difficult, if not impossible, to get money from if your credit is less than stellar.
Many dealerships offer great terms and interest rates, especially on their end-of-year models that they are trying to clear out. In order to get these great rates, though, you must have stellar credit.
Make sure you know what lender the dealership uses; you don’t want a fly-by-night lender who hasn’t been in business very long.
Some dealerships offer financing to those with bad credit; keep in mind you will likely pay a higher interest fee. If you really want the car, though, and you’re looking to rebuild your credit, getting a loan through a dealership may be an ideal choice.
How an Auto Loan can Help Build Poor Credit
While you may end up paying more in the long run for your car, getting a loan can help you rebuild your credit. When you make regular monthly payments on time you are demonstrating that you are a responsible lender, and your credit rating will reflect this.
It may take six months or even a year to get your credit back in good standing, but once it is you will have many more options for financing other homes and even getting a mortgage.
Building Your Credit
Building your credit does take time but is well worth it. To help you budget, set aside a certain amount each week so that when your car payment is due you will have the money to cover it. For example, let’s say your payment is $250 per month. That means you will have to set aside $62.50 each week. This is much easier than trying to pay the entire payment in one paycheck.
Having and maintaining good credit is all about being responsible with your money. Out of each paycheck, make sure you pay yourself first (10% going to a savings account or retirement fund), and then set aside a certain amount for things like bills, groceries, gas, etc.
Anything left over can be used for miscellaneous purchases or just kept in your account. Remember you will have to budget for things like repairs & insurance.
It may sound easy but this takes discipline and practice. It may take you a few weeks to get settled into a savings routine that works for you.
Whatever option you decide to choose – bank or dealership loan, make sure that you are budgeting for car expenses and that you’ll be able to handle the payments; otherwise you won’t be successful in rebuilding your credit, and might actually make it worse.