So you've found your dream car, but how will you pay for it? A new car is one of the biggest investments in life. There are several options, but like any investment in life, you need to make the right decision: should you pay with cash, credit card or personal loan?
Pay for your car with cash
Some buyers pay for their car using cash, but that's not an option for everyone. Many will rely on the following two options in order to make their dream of becoming a new car owner come true.
Pay for your car with a credit card
This option definitely gives you protection if the car isn't good, but remember, not all sellers take credit cards, and interest rates can be high. Consider that you also have to have a lot of self-discipline to be able to pay off what you've borrowed and not just the minimum monthly payments, or you could end up owing money long after the car is gone.
Take out a personal loan
Taking out a personal loan is a popular option among potential car buyers. However, real planning and buying goes hand in hand with this decision. Entering a car loan contract too hastily can lead to some serious financial problems. You could lose your new car, the money you already put into your new car, and the loss of your good credit.
As you probably already know, these loans can be arranged through a lender or a bank. Payment periods can be set to suit your budget, and interest rates can be very competitive, which implies getting a great deal. Personal loans however, can tie up your limited credit line, which means you may find it difficult to borrow money for other purposes until the loan is repaid in full.
Car loans in the form of a personal loan can be subjected to higher interest rates than home loans due to the shorter terms. People with the perfect credit scores tend to get the best terms, interest rates on auto financing, and are more likely to be approved. Auto lenders are keeping a tighter grip on their lending requirements because unlike a house, a car is mobile and can disappear leaving the lender with the problem. If you have good credit, you are in good shape to get a car loan. But if you have less than perfect credit, you're not out of luck. You may qualify for auto financing, which means paying a little more in interest and putting a little bit more money down.
If you are buying a car from a dealer, you can also arrange your finance through them. This can also be very convenient because the dealer can also help you complete all the required paperwork, process the payments, and arrange collection of the car all in one go. They can also give you some extra room for haggling, so they may offer you a very competitive rate of interest.
Two main ways to finance a car through a dealer
1. Pay off the balance of the loan over a set period of time. This is usually anywhere between twelve and sixty months. At the end of the term, you'll own the car outright.
2. Personal contract purchase (PCP) or also known as leasing. The PCP gives you a lower monthly payment, but the tradeoff is that you'll still owe a lump sum, called a balloon payment, at the end of the term. At that point, you can either hand the car back, trade the car in for another one, or pay the outstanding balance and own the car outright. A PCP can be a cost-effective way to drive a new or nearly new car. But remember, you won't own the car outright unless you make the final payment.
However you decide to pay for your next car, shop around for the best deal and always make sure you can afford the payments. Hopefully, car ownership will be a pleasure and not a pain.
Always think about how long the car will last, how much gas it will eat, and how long it will be in the garage versus being on the road. Be mindful of how the car's style also fits your budget. In fact, budget should be the final arbiter of your automotive choices.