Most people don’t buy cars that often. So, when it comes time to get financing, the process can feel confusing. There are ways to prepare yourself and avoid getting tricked when buying and financing a car. For starters, talk to people you trust who recently purchased vehicles. Ask what rates they received based on their credit. See if their payments sound affordable to you.
When you know average pricing in your area and check what you actually qualify for rate-wise, it’s harder for dealers to fool you with crazy numbers. You also have backup lender options in case the dealer can’t match better terms. Knowledge gives you power! You should explore the loan marketplace to find out the best lending institution offering easy funding options like no guarantor loans from a reliable direct lender.
Banks and credit unions often offer lower interest rates than the dealer. Apply for pre-approval with your bank first. Then, negotiate with the dealer if they can beat your pre-approval terms. Having a backup plan puts you in a stronger position.
Set a Budget Beforehand
It’s tempting to fixate on slick vehicles way out of your budget. Monthly payments sound doable – but those stretch for years. Before you even go look at cars, decide what expenditures truly fit your lifestyle.
Factor in all the Costs
Besides just the car payment, insurance and maintenance add up. Consumer experts recommend allocating no more than 10-15% of your total monthly income towards complete transportation costs. Will you still cover other expenses comfortably?
Crunch the Long-Term Numbers
Run an online auto loan calculator yourself to estimate the true multi-year expense at different loan rates and terms. Going in with clear boundaries based on big-picture finances prevents impulsive purchases from straining the bank. Cars sell dreams but wreck budgets when acting without discipline. Know what you can genuinely swing before kicking tyres.
Shop Around for the Best Rates
Do your homework and get car loan rates from different places before going to the dealer. Check bank and credit union rates first, which are often cheaper. Having pre-approval gives you bargaining power.
Get your latest credit report and score first. Different scores mean different rates offered. Know what terms you qualify for. This allows you to recognise a mediocre offer.
Negotiate Better Rates
If you have pre-approvals and rate comparisons, negotiate firmly with the dealer. Show you already have financing options. Ask if they can beat the terms. They may be motivated to get the sale.
A lower monthly payment doesn’t always equal real savings. It may just stretch out what you pay overall. Negotiate the purchase price, interest rate, and total amount paid over the loan term. That’s what matters most.
Understand the Loan Terms
The interest rate has a big impact on your total cost. A rate of 6% versus 10% makes thousands of pounds’ difference over a 5-year loan. Negotiate the lowest rate based on your credit score and pre-approvals.
Know the Loan Duration
The loan term, like 36 or 60 months, matters too. A lower monthly rate over 60 months seems good, but you pay much more overall than a 36-month term. Make sure the duration fits your budget.
Watch Out for Fees
Dealers slip in extra fees that quickly add hundreds of pounds. Common ones include documentation fees, dealer fees and extended warranty costs. Check if fees are fixed or negotiable. Don’t assume they are mandatory.
Be Careful with Add-Ons
Dealers often push for additional services like extended warranties, rustproofing treatments, and paint protection sealants. Be wary of expensive extras that boost their profits but provide little value to you.
New vehicles already come with manufacturer warranties and guarantees. There’s no need to purchase added coverage, which you essentially pay for twice. Check what features and protections already come included standard.
Consider Insurance Add-ons Carefully
Things like gap insurance help pay off your remaining loan if the motor is written off. Whilst potentially useful, gap insurance is overpriced by the dealer. Check with your insurer or bank separately if needing this extra protection.
Fancy in-motor entertainment systems, leather seats, and other upgrades ramp up the price. Stick to the features and models you need rather than over-improving. Remember, anything financed gets paid for with interest over years of monthly payments.
Avoid Long-Term Loans
Longer finance terms spread payments out but increase your total interest paid.
For example, £10,000 borrowed over 5 years at 10% interest means you pay £2,414 in interest. Stretching that to 7 years accrues £3,707 in interest fees – over £1,300 extra!
Ideally, keep your finance term lower than your motor’s expected life. Financing an old banger for 6 years that might last 4 doesn’t make financial sense. Consider what the vehicle will be worth when your term ends.
When Your Credit Score Goes South
Getting approved for the cash you require becomes difficult when your credit rating drops. Past financial issues can mean extra hurdles when applying for your next loan.
Say your credit score took a hit after an illness meant missing job weeks. Now, the car needs major work. Without ready savings on hand, you may turn to small personal loans for the £3,000 needed. However, poor credit triggers higher interest rates from typical money lenders. If approved at all, you may face an absurd 29% interest or worse. This stings the budget now and further damages your credit by creating new debt.
Fortunately, some providers specialise in installment loans with bad credit. Direct lenders give these loans and you just need to fulfil the eligibility criteria to get the acceptance.
Therefore, applying with a lender who understands unintended financial setbacks can mean qualifying for an instalment loan even with past credit errors.
Conclusion
Car dealers like to discuss monthly payments. However, the purchase price, interest rate, and total loan cost matter more. Negotiate the “out-the-door” bottom line price first, before payments. Calculate the total amount you’ll pay over the life of the loan yourself.
Walk away from overpriced extras like extended warranties the dealer tries selling. These just boost their profits. Research fair costs of extras beforehand if you want any. But your budget decides what you can afford. Stick to what you need.
