So, you are finally ready to start looking for a car? This is an exciting time for any young adult, but it can also be tricky if you do not know enough about the finance options available. You may end up paying more than you budgeted for if you choose the wrong option, but with some easy-to-understand advice, you can make the best decision for your needs.
When you are looking at pre-owned car dealerships it is important to have a budget in mind. This can help you to decide which car finance option is ideal for you. You might be able to afford finance from a used car dealer if you are looking for lower interest rates, but if you can afford a higher interest rate, you can use a car loan from a lender to look for the perfect car from used car dealerships. Not sure which is the best for you? Read on below for the pros and cons of both.
The Pros and Cons of Dealer Finance
You are likely wondering what, exactly dealer finance is. Simply put, dealer finance is a car finance option where the dealer helps you to secure a loan for a car by working with their preferred lender or bank.
- The process is simple: As a first-time car buyer, you likely will not understand much of the terminology that comes with car shopping. With dealer finance, the car dealer will negotiate the deal with the lender, giving you peace of mind that everything will go smoothly. And you may even receive special deals on car insurance or car prices by going through the dealer.
- You can secure a loan even with a low credit rating: Some car dealerships will offer finance even to those who might have no credit or a low credit rating. This is ideal for students who are looking to buy their first car but who might not have the best credit rating. Or you might have not have had a chance to build your credit history, which can affect your ability to secure a loan.
- It might only apply to new models: While dealer finance is affordable, you might find that it is only applicable to newer models. And this will likely not meet your budget, especially if you are only starting out and do not have a large budget. If you have your eye on an older model, it might not be affordable without the dealer finance. Be sure to ask about the options available to find out what you can get on this type of finance.
- There might be higher interest rates: Because the dealer will be negotiating with the bank, you might find that they increase the interest rates by a few percent in order to cover their commission fees. While it is only a small amount, it can become expensive over time. Examine the terms and conditions of the loan carefully when choosing this option.
The Pros and Cons of a Car Loan
A car loan is when you as the buyer approach a bank or lender in request of a loan. You will arrange the details yourself and will need to negotiate the terms and conditions based on your budget and affordability.
- There will be better interest rates: A bank or lender will offer you the best interest rates possible because they will have taken all of your financial information into account and can craft the perfect package for your needs. Some dealers offer a higher interest rate or a markup on what their lender is offering, which can become expensive over time. You will be able to craft an affordable package working with your lender.
- You can negotiate terms and conditions: With a lender, you will be able to negotiate better terms and conditions. You can speak to them about your situation and ask them for favourable interest rates as well as a repayment structure that best fits your pocket. Be sure to research the car you like and find out its market value so you can use this price when speaking to the lender.
- There is a lot of paperwork: Paperwork can become tiresome when applying for a car loan. And using a lender means that you will need to fill in paperwork and provide all the necessary documents. It might also be a longer process, as the lender will need to check your credit rating and ascertain why you might have any issues that might occur during this check.
Choosing finance for a new car can be tricky. You will need to build a budget by looking at the whole picture, including insurance costs and maintenance expenses. Dealer finance might be ideal if you have a low credit rating, but the interest rates can be high. Similarly, a car loan allows for better interest rates but involves a lot of paperwork. Choose the option that best suits your needs and you will soon find yourself driving into the sunset in your new set of wheels.