Financing helps people obtain a new car when they do not have the full payment up front. The excitement of a new car can lead people to make decisions without taking all of the issues that come with financing into consideration. Being uninformed or failing to take the time to thoroughly understand the entire process can have a negative financial impact in the future. With a few tips and some understanding of how car financing works, you can optimise your car buying experience.
Determine How Much You Can Afford
Before even looking at vehicles, determine what you can afford. This includes the overall price as well as the monthly payments. Not creating a budget and sticking to it can cause financial problems including unnecessary debt. To figure out how much you can spend, take your income and subtract your expenses. Be sure to list necessities such as food and household items. The amount leftover is your surplus. This will give you an idea of what you can afford, but take care to figure in registration, fuel and other costs associated with owning a vehicle. Once you determine how much you can spend, you can narrow down the search process by only looking at cars that fall within your price range.
Secure the Financing
After setting a budget, the next step is to secure financing. During this step, you have two main choices: financing through a financial institution or directly through the dealership. If you have a personal bank, you can apply for a vehicle loan directly. Regardless of the route you take, you will be required to apply for the financing. This often includes providing several documents such as proof of income and valid identification.
Shop Around for Rates
It is not necessary to stick with the first lender that provides you with a quote. Shop around and see if you can find a lender that offers a lower interest rate. Even if the difference is small, it can save you quite a bit by the time the vehicle is paid off.
Choose a Vehicle
After securing a lender, look for a car that falls under the loan amount. The price is not the only factor to consider however, as you should also look at the features offered, fuel economy and whether the car is likely to depreciate in value before it is completely paid off.
The Down Payment
The higher the down payment, the less you will owe in the end. This also lowers your monthly payments, making the car more affordable. Some lenders require a set down payment while others are willing to negotiate this point.
Know the Length of the Loan
Car financing can be anything from one to five years and the shorter the financing period, the higher your monthly payments will be. However, while extending the length of the financing can drastically reduce monthly payments, it can increase the amount of interest you will pay. In simple terms, the longer the loan, the more you will end up paying in total.
Read the Fine Print
Do not assume you know all of the financing details. Read the contracts and agreements carefully. Often times, a vehicle finance deal will include other things such as insurance that you are not counting on. When dealing with the lender or dealership, have them explain what every cost is going towards. You should also take the time to read the terms of the loans. Take note if you will be penalised for paying the car off early.
Learn Interest Rate Terms
There are two main types of interest rates and it is important to know what each entails before you agree to terms of a contract. A fixed rate means that the interest rate will stay the same throughout the entire contract period. A linked rate works in conjunction with the prime lending rate of South Africa. If the country's prime lending rate decreases, the same will be true of your interest rate.
Finalise the Deal
After securing a vehicle and agreeing to the terms of financing, you are ready to finalise the deal. This requires you to sign a credit contract, which lists all details of the purchase. You will also be required to sign any warranty or "as is" papers. This states you are aware of the warranty provided or that you acknowledge a warranty is not included. Each dealer or lender will also require different types of documentation to show proof of your identity, residence and income. After finalising the deal, you must file for a transfer of ownership according to the law.
Financing is ideal for people needing a vehicle. Whether the car is new or used, financing can eliminate the need to come up with a large sum of money at once. While financing is beneficial, there are also issues to consider to avoid problems in the future.