3 Essential Car Financing Tips


Financing a car

Car loans get a bad rap, but I believe there are ways to finance a car responsibly. If you pick a reasonably priced vehicle and shop around for the best interest rate, it’s possible to secure an affordable car payment that won’t impede your other financial goals. 

Because the price of both new and used cars have gone up considerably in the past few years, I may need to get a car loan for my next vehicle. Although I’m saving money every month for a new car, if my vehicle broke down tomorrow and needed to be replaced, I’d probably have to explore financing options. 

If I end up needing a car loan, here are three strategies I’m going to use to secure a payment that’s well within my budget. 

Buy a Reasonably Priced Car 

One of the reasons I may need to take out a car loan is because I want to get a reliable vehicle. I have about $10,000 saved for my next vehicle, but that doesn’t go far in today’s market and will only get me a high-mileage sedan. I don’t want to purchase a car that I’ll have to repair often or replace in a few short years. 

However, I’m not going to splurge on a vehicle with all the bells and whistles either. I’m looking at basic, low-mileage sedans with all-wheel drive because I live in an extremely snowy, rural area. Unfortunately snow tires just don’t cut it on poorly groomed gravel roads, or else I’d go with front-wheel drive to save money. 

Sometimes you have to choose upgraded features for safety reasons, but it’s financially unwise to spring for a luxury vehicle you don’t need. For example, unless you work in construction, you probably don’t need a fancy pickup truck for your daily commute to the office. In order to secure a car payment you can afford, it’s important to choose the lowest cost vehicle that still meets your needs. 

Follow the 20/3/8 Rule 

Another car financing tip I’m planning to follow is the 20/3/8 rule. This guideline states that you should put at least 20% down when buying a car to lower your monthly payment and total interest costs. You should also aim to limit the length of your loan to three years or less so you can get out of debt quickly.  

The last number indicates that you should limit your monthly car payment to 8% of your gross monthly income. That way you won’t be squeezed financially by debt repayments. However, I’m aiming for a much lower car payment than I could afford based on this rule. I’m only comfortable with a payment in the $200 to $300 per month range, so I’ll probably make a much higher down payment than 20%. 

Secure a Low Interest Rate 

Although car dealerships can arrange financing for you, they may not be able to get you the lowest interest rates. I’ve found that credit unions usually offer the best rates, but I’m definitely going to shop around if I end up needing a car loan. Securing a better interest rate can save you hundreds or even thousands of dollars in interest over the life of your loan, so it’s worth taking the time to comparison shop. 

It’s also worth noting that new cars can usually be financed at a lower interest rate than used cars, which is why I’m keeping my options open. I’m not sure if I’m going to purchase a used car or a new car yet. The used car market still isn’t back to normal after the pandemic. As a result, prices for used cars with low mileage are comparable to the price of a new car. It’s possible that it could end up being cheaper for me to finance a new car, so I’m planning to consider both new and used vehicles. 

Build Your Credit

If you think you’ll need a car loan in the future, it’s also important to work on building your credit. Borrowers with credit scores of 700 or higher usually get the best rates. You can boost your score by practicing good financial habits like making all your payments on time and lowering your credit utilization rate, which is the percentage of your available credit that you’re currently using. Swiping your credit card less often and reducing the balance can help you maintain a favorable credit utilization rate. 

Do you have any car financing or shopping tips you swear by? Share your insights in the comments! 

Read More 

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What to Look For In a Car Loan

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