How to Finance a Car the Smart Way

A car is probably the most expensive resource that you will buy after a home. As per the analysis of Kelley Blue Book, the estimated price of light vehicles in the United States rose to $37,185 in 2019, showing an increase of 4 percent over the last year.

Most of us feel overwhelmed about the process due to the nature of the jargon and the amount of money involved. You may think that you are weighing up all the factors and getting the best possible deal, but the excitement of the situation can prevent you from rational decision making. What you don’t want to do in this situation is simply choose a car and accept whatever terms a dealer offers.

Instead, explore different financing options and opt for the deal that makes the best financial sense. In this post, we share some useful tips to decrypt the confusion and simplify the process for you. Use these tips to make sure that you finance your vehicle the smartest way possible.

Set a budget:

Before you shop around for a vehicle, you need to determine the amount of money you can afford to spend on a car. Make a list of must-have features that you want in a car. Be clear on the make and model, gas efficiency, desired seating, and any functionality that might be important to you. The list will give you an idea of how much you will need to spend to finance the car.

Once you have determined what you really need from a vehicle, you can start looking around for cars with dealerships and the online marketplace. It is obvious that larger and new vehicles will be more expensive; if you cannot afford them, it is only wise to buy used cars without putting a strain on your budget.

Evaluate your credit score:

Once you have laid out a budget and the minimal requirements from a vehicle, you can start checking your credit score. There are various credit bureaus that can check your FICO score for free. It is crucial to evaluate your credit score in the beginning because if you lie somewhere in the average or lower range, you will have time to improve it before you apply for financing. This can help you finance your vehicle at an incredibly lower interest rate.

Save up for the down payment:

An ideal way for buying a vehicle is to pay all the money upfront. But since it is not possible most of the time, you will need to start saving up for the down payment. You can even finance a vehicle with no money down, but that will get a larger loan and higher interest rate. A larger down payment can also offset a poor credit score because you will have a lower outstanding fee as you drive the vehicle off the lot.

Pick your option:

Before you shop around for a vehicle, it is necessary to understand the different financing options and evaluate each of them. Develop a working knowledge of the terms and understand how they operate. The most popular options include:

  • Auto loan
  • Hire Purchase
  • Vehicle Trade-in
  • Leasing

Auto loan:

Car dealerships, banks, and credit unions offer auto loans that allow borrowers to buy a car in monthly installments. Auto loans include all the vehicle fees and taxes that add to the total loan. Dealers often get a subsidy from vehicle manufacturers for the sale of new units that allows them to offer better rates than other lenders.

You can also negotiate the terms with individual financiers and get a personal loan based on your credit risk. Whatever credit options you choose, make sure to keep yourself aware of the interest rates and any hidden charges. These charges can add up and severely affect the total amount that you will repay to the lender.

Hire purchase:

Another common car finance option is the hire purchase. It involves a motor dealer who sells a vehicle to a finance company, who then rents it to a customer for a set monthly repayment over an agreed period of time. The finance company owns the car until the customer makes the final repayment.

Vehicle trade-in:

If you already own a used car, you can trade it in for a new model. The old vehicle acts as credit towards the price of the one that you are purchasing. So, its value is subtracted from the cost of the new vehicle. The sales price of your old car will depend on the car condition as well as other market factors.


Auto leasing is a popular financing option that involves two parties: the lessee and the lessor. It allows the lessee/user to rent a vehicle from a dealership/lessor for a certain period of time. The monthly repayments depend upon the lease period, interest rate, as well as the expected residual value of the vehicle.

The dealer allows the user to drive the vehicle as long as s/he makes monthly lease payments. A downside of auto leasing is that at the end of the contract, you will return the car to the dealership unless the lease arrangement allows you to purchase the vehicle.

Negotiate the price and terms:

There is often a better offer if you negotiate smartly. Never make the first offer because the salesperson will gain leverage by knowing your bottom line straight away. They will simply adjust the terms and conditions of the financing to fit your proposal. Consider all the taxes, fees, and additional costs before finalizing the price with the dealership.

Final thoughts:

Very few things are as exciting as a vehicle purchase. But it can be quite an intimidating experience due to a confusing process. Therefore, so, you need to be completely aware of every aspect of the transaction. Educate yourself, evaluate your options, and negotiate to ensure the best possible deal.

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