Apart from a house, a car can be one of the most expensive things you’ll buy. The ideal situation in purchasing a vehicle is paying for it upfront and driving away with it fully paid and without debt. However, this scenario might not be feasible for many people, with statistics showing that 69% percent of Americans have less than $1000 in their savings account.
The good news is that you can still own your dream car with financing. Many types of financing options are available for you, depending on your needs. From tips like reviewing your credit scores to purchasing an EV, here are some clever ways you can finance your car
1. Review your credit score
The first step to getting the best car loan is to check your credit score before you even step into the car dealership.
You’ll often see advertisements for car loans with fantastic interest rates, sometimes with no interest. However, they don’t say that these rates are only available to buyers with a good credit score. A good credit score usually means a score of 750 or better. If you have this kind of credit score, you can enjoy these rates when you shop for car insurance for your vehicle.
You might still get a car loan if your credit score is low in the 700s, but you might not be able to qualify for the best promotions the dealership has. If your credit score is under 650, you might want to shop around and get the best deal you can get with your credit score. Shopping around is also the best way to shop for auto insurance when you need it later on.
2. Hire Purchase (HP)
Hire Purchase (HP) is a type of car financing setup, so you own the car once you make all the monthly payments. If the most important thing for you is to keep the overall cost low, this kind of finance may work for you.
You’ll usually sit down with your dealer to work out an HP deal. With this kind of deal, you’ll pay an initial deposit. This deposit is usually 10% of the car’s value, although you can put more—the larger your initial deposit, the lower your monthly payments. You can also pay a higher monthly fee to get a lower interest rate. A typical HP deal is usually between one to five years.
There are a few downsides to this type of financing. The first is that you don’t own the car until you’ve paid it all off. Second, the financier can take the car if you miss your monthly payments.
3. Personal Contract Purchase (PCP)
If you plan to change your cars every few years, then a PCP may be something you want to consider. A PCP is a form of finance that allows you to loan a car from a financial institution. Like an HP, you’ll pay an initial deposit followed by a set period between 18 to 48 months.
Unlike an HP, where you’ll be paying the car’s actual value, in a PCP, you’ll pay the depreciation. Depreciation is the difference between what the car is worth at the start of the agreement and what the dealer says it’s worth at the end. Dealers term this as the “guaranteed minimum future value.”
Unlike an HP where you own the car at the end of the contract, you DON’T own the vehicle with a PCP. If you want to purchase the car, you’ll have to pay an optional final payment, usually related to the value of the car. Like many people who use PCP, you can also opt for a new PCP and get a new car.
4. Get a Personal Loan
A personal loan is a traditional route you can go through in financing your car. You can use a personal loan to pay for anything, including a new car purchase. Although personal loans are more expensive than car finance deals, they put you in control of your purchase. With a loan, you own the car, and you have the flexibility to sell it if you need the extra cash.
Banks have different requirements for a personal loan, and you should check with your chosen bank for what they need. However, the following are usually what the banks look at when they process a personal loan:
- Credit Score. Many banks require you to have at least a 600 on your credit score for them to consider your application.
- Income. Although banks don’t disclose the minimum income requirement, your bank looks at your income. This is to make sure that you have the means to pay off the loan.
- Debt-to-income ratio (DTI). DTI is expressed as a percentage, and banks use it to predict your ability to make payments. It represents the portion of your gross monthly income that goes towards your monthly debt. An ideal ratio for DTI is less than 36%.
- Collateral. If you apply for a secured personal loan, you need collateral. Collateral is a valuable asset put against your loan. It can come in the form of real estate, investments accounts, or precious metals, to name a few.
5. Go Green
Going Green and purchasing an electric vehicle (EV) or a hybrid vehicle is good for the environment. It’s great for your pockets too. For starters, you can get a federal tax credit. You can claim $7,500 for pure EVs when you file your taxes the following year. And you can also claim anywhere between $2,500 to $7,500 for hybrid electric vehicles.
There are also state incentives which differ depending on where you live. For example, Maryland, South Carolina, and Texas offer a $3000 state credit. When you combine it with federal tax credits, the offer comes to $10,500 off an electric car.
Drive Your Dream Car with Smart Financing
Driving your dream car can be a reality with the right type of financing. All you need to do now is weigh your options and decide which financing option works best for you.