You’ve found the car of your dreams. Now what do you do? How do you get the money for it? When an individual decides to buy a new or used car, he or she often needs to finance part of or all of the vehicle’s price. Because cars are such a big purchase, many buyers can't provide cash down for the vehicle, so they choose to finance a car over a period of time. There are two financing routes you can choose to go down — either getting a direct or a dealer loan. Before you choose to finance your next vehicle, you should do your homework to ensure that you get the best deal.
Method 1 Doing Your Homework.
Find out how much you can afford up front. If you know the ballpark value of what you want to pay for a vehicle, and how much you can afford to pay in cash, you will know about how much you will need to finance.
Maximize your down payment. A smart way to finance a car is to get as much of a down payment as you can. The more you can pay at the beginning of a deal, the less you will have to pay in interest. Even if you have to temporarily sell some assets to buy the car outright, that can be a better deal than financing a major portion of the cost.
Know your credit score. Much of the financing offer for a car is based on your credit score. Those with good credit will get better interest rates and cheaper car financing offers. This is important no matter who you finance your vehicle through.
Find out your credit score either through the dealer or online at websites like www.annualcreditreport.com, www.freecreditscore.com, www.creditkarma.com, or www.myfico.com.
If your credit score is higher than 680, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the better bargaining position you will be in.
Compare loan rates online. There are many websites that compare deals at no cost. Additionally, it is a great way to get in contact with various companies.
Get the necessary materials together. Most lenders will want your name, social security number, date of birth, previous and current addresses, occupation, proof of income, and information on other outstanding debts.
Method 2 Getting a Direct Loan.
Contact certified lenders. Local and national banks, as well as credit unions can give you the terms and interest rates they are offering on used car loans over the phone and online. Shop around and find the best rate for you. You don't have to apply for financing through the dealer, though you certainly can. Oftentimes you can get a fairer deal when you figure out your financing first before you walk into the dealership. Apply for financing through a bank or an app that connects you to lenders.
Oftentimes, credit unions have the lowest interest rates, especially if you are a member. Check with your employer to see if they have any connections with local credit unions for you to take advantage of.
Many lenders offer 5 year loans on vehicles that are five years old at most. Older vehicles are often only eligible for 1 to 2 year loans. In many cases, the fear is that an older car will break down and then borrowers will default on their loans.
Additionally, lenders often impose mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically, they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer. In these cases, you’ll have to get a deal loan. See below.
Solicit rate quotes from several lenders. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans. This is because lenders are fearful of financing used vehicles.
Be as specific as possible with a lender. Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The more detail you can give the lender, the more firm your rate quote will be.
Talk to lenders about any fees or extra charges. Some lenders offer low interest rates and make back the money by tacking on additional fees and charges to a loan deal. You'll want to know about these, as well as any other specific loan agreement aspects like prepayment penalties, which can trigger fees if you pay the loan off early.
Get prequalified. Fill out the paperwork ahead of time. Many banks or lenders will pre-qualify you for a car loan based on your credit score, the type of car you plan on purchasing, and your driving history.
Ask the lender with the best rate offer for a pre-qualification letter. It should outline the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car. When you go to the dealer's lot, you can show them evidence pre-qualification from a reputable lender. This will expedite the car buying experience. It will also tell the car dealer you are ready to buy.
If you haven’t prequalified, you can get financing at the dealer's lot for a one-stop shopping experience, but having other lender alternatives helps you to get the best deal.
Method 3 Getting a Dealer Loan.
Get a loan through a new or used car dealer.
In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. In many cases, smaller dealerships work with third party lenders to finance your vehicle. Because they play the middleman, they pass off the costs to you. Therefore, you may want to apply for a direct loan first and cut out the dealership middleman.
In some cases, financing lenders like local banks and credit unions won’t take a chance on used cars. For used cars, most dealers will finance used cars they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
Bring leverage. Bring interest rates from direct loan lenders, even if you plan on financing with the dealer. Dealers are more likely to offer lower interest rates, if you show them that you know what other lenders are offering. Make sure you research competitive interest rates based on your credit score.
Offer a down payment in cash or trade equivalent to at least 10% of the vehicle's purchase price. The larger the down payment, the less money you will have to finance and the less interest you’ll have to pay on that loan.
Tips.
If you have a low credit score, consider asking someone with a high credit score to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
If your loan application gets rejected, don’t feel bad. Most likely, the lender doesn’t think you are able to pay back the loan on time. Reassess your budget and try again or try a different lender.
Warnings.
If you finance a used car, be prepared to pay for comprehensive insurance on the vehicle, which is more expensive than collision insurance commonly applied to used cars. Lenders require that you carry comprehensive insurance to protect their investment. Lenders often fear that if you damage the car, you will default on the loan, so they make you take out better insurance.
Be wary of dealers who advertise financing with "no credit check." Typically, these car lots sell high-mileage vehicles with inflated down payments and interest rates.
If you need a car and can't afford to buy one with cash, financing is always an option. If you want to finance a used car, you have the choice of getting your own direct financing, or having the dealer obtain financing for you. If you have a low credit score, "Buy Here Pay Here" lots may be your only option, but should only be used as a last resort.
Method 1 Getting a Direct Loan.
1. Request a copy of your credit report. Knowing your credit score will give you a good idea of what kind of rates and terms you'll potentially be offered. In the United States, you're entitled to one free copy of your credit report every year.
Check your report for errors or inaccuracies that could be affecting your credit score.
If you have a credit score of 680 or above, you're a prime borrower and should be able to get the best possible rates. The higher your score, the lower the rate you can potentially negotiate with lenders.
2. Contact local banks and credit unions. If you have had a credit or savings account with the same bank for a number of years, start there when looking for a direct car loan. Your history as a customer may get you better rates.
Branch out to other banks in your area. Credit unions often have more forgiving loan terms and fewer restrictions.
Banks typically won't do a direct car loan for a car purchased from a private owner or an independent dealership. In those situations, you may need to try to take out a personal loan. This is also true if you're buying a collector or exotic car.
3. Try online lenders. If you're not a prime borrower, it's still possible to get a direct loan for a used car. There are a number of online lenders who are willing to finance used cars for people with less than stellar credit.
Since online lenders have less overhead, they typically will offer you a lower rate than you could get from a brick-and-mortar bank or credit union.
These loans may come with more restrictions than the direct loan you could get from a bank with better credit. For example, they may not finance cars more than five years old, or cars with over 100,000 miles.
4. Get rates from multiple lenders. Before you choose a loan, apply for several so you can compare the rates offered. Many banks and lending companies have a pre-approval process that won't affect your credit.
Multiple offers may give you the opportunity to negotiate for a better deal. For example, if you got a better rate from a different bank than from your own bank, you could get your bank to match that rate to get your business.
5. Complete a loan application. Once you've decided which lender you want to use for your financing, you'll typically have to fill out a full loan application. Many lenders give you the option to complete the application online.
You'll need to provide basic identification information, such as your driver's license and Social Security numbers. You also may need to provide basic financial information regarding your income and debts.
If you've had some credit problems in the past, you may want to go into a bank and apply for the loan in person so you can talk to a lending agent.
Your loan agreement will include basic requirements that the car must meet. As long as the car meets these requirements, you can use the financing to purchase the car.
6. Negotiate with the dealer. In most cases, you're going to secure direct or "blank check" financing before you find the specific car you want to buy. Having financing already secured puts you in a stronger position to get the best price from the dealer.
When you bring your own financing, you're saving the dealer a lot of costs. Ask if there's a discount available for that.
Since you're buying a used car, have it inspected before you buy it and go over the car's history. The car is a better buy if it's had fewer owners and never been in an accident.
7. Give the dealer your blank check. Lender policies vary, but in most cases you'll get a check for the exact amount of your car, or a blank check that's worth any amount up to the maximum amount your lender has approved.
When you buy a car using direct financing, you still must maintain full coverage insurance on the car. Your loan agreement will include information on the minimum amounts of coverage you must maintain.
Method 2 Using Dealer Financing.
1. Research interest rates. Dealers have special financing offers available throughout the year. Especially if you're not picky about the make or model of your car, shop around and see who has the best deal.
Know your credit score and how qualified you are for different offers. Typically the best offers are only available for prime borrowers with credit in the 700s or higher.
If you're trading in an old car, look for dealer offers to double the price on a trade-in, or pay a minimum amount for any trade-in regardless of its condition.
2. Choose your car. If you've done your research, you have a few dealerships in mind. You should be able to evaluate their inventory online before you go visit in person. Find the best car for you, looking at overall price.
Dealers may advertise monthly payment amounts rather than total price. This can be a way to charge you a higher interest rate.
Dealers typically will finance any car on their lot, so you may have more variety to choose from if you use dealer financing than you would if you used direct financing. However, this might not necessarily be a good thing – you still need to check the car's history and have it inspected before you buy.
3. Offer a sizable down payment. Cars depreciate in value. If you're buying a used car, you want to finance as little of the total price of the car as possible. A down payment of 10 to 20 percent of the purchase price of the car typically will get you the best rates.
A sizable down payment can help you avoid being underwater on your loan – meaning you owe more for the car than it is worth. This is particularly important to avoid when you're financing a used car, which could develop mechanical problems relatively quickly.
4. Apply for financing through the dealer. You'll need basic identification information as well as information about your income and employment to complete the financing application at the dealership.
It may take a few minutes, but in most cases the dealer will have a financing offer available for you that day. Then they'll call you back into an office to discuss the terms you've been offered.
The finance company may require additional documents from you, such as pay stubs to verify income. If the dealer mentions any of these, make sure you get copies to the dealer as soon as possible so as not to jeopardize your financing offer.
5. Negotiate the deal. If you've done your research and know your credit score, you may be able to get better terms from the dealer than what you're initially offered. Review each term and see if you can improve it.
For example, you typically want the shortest term loan, since it will usually have the lowest interest rates. But dealers often focus on the amount of the monthly payment. Financing for a shorter term does mean a higher monthly payment, but it will save you money overall.
6. Use cash for extras. Dealers tend to tack on extra fees, including sales tax, registration fees, and document or destination fees. You also may end up paying extra for dealer warranties, especially for a used car.
The dealer typically has no problem rolling these extra fees into your financing, but there's no point in paying interest on fees and tax. Pay that out of pocket if you can.
Method 3 Using "Buy Here Pay Here" Financing
1. Exhaust all other options. If you need a car and have had credit problems or have an extremely low credit score, BHPH financing is available for you. However, due to the high rates you should consider this only as a last resort.
There are some franchised dealerships, particularly Ford and Chevy dealerships, who are willing to work with customers who have bad credit. It may be possible for you to get a loan there. It wouldn't be the best rates, but it you would still pay less than you would at a BHPH lot.
If you have a relative with a good credit score, you might find out if they are willing to co-sign on the loan with you. That could get you a better rate or make traditional lenders more willing to work with you. This option can be especially valuable if you're young and don't have much, if any, credit history.
2. Ask if the dealer reports to credit bureaus. Because BHPH lots finance the car themselves, they don't always report to credit bureaus. If you have bad credit or no credit, you want the payments you make for your car reported so you can start to rebuild your credit.
You may have to visit several lots before you find one that reports to credit bureaus, but be persistent.
3. Research the car thoroughly. Any car you buy from a BHPH lot typically is sold "as is." Some of these cars may have mechanical problems, and the lot may not be required to disclose those problems before you buy the car.
Demand a Carfax or similar car history report so you can see how many owners the car has had and whether it's been in an accident. These lots typically have older cars, so they've likely had several owners – but a car that's changed hands several times in the past few years may be a red flag.
Take the car to a reputable mechanic before you buy it and have them conduct a thorough inspection. If there are any major repairs that need to be made, you may be able to convince the lot to make those repairs before you purchase the car.
4. Negotiate with the dealer. BHPH dealers often present the price of a car – and the financing terms – as though they are non-negotiable, but that's typically not true. Even though you may not be in the best bargaining position, you can still try to get a better deal.
The more of a down payment you can make, the better your terms typically will be. These lots often specialize in low down payments, but that doesn't mean you can't pay more.
If you're buying a car at a BHPH lot, your down payment should be as high as possible to keep you from ending up underwater – try to aim for somewhere between 40 and 60 percent down.
5. Make your payments on time. You typically won't have to make payments for a long term, but it's essential to make every payment on time if you want to rebuild your credit. Some BHPH lots will repossess a car after as few as one missed payment.
Some BHPH lots require you to make a trip to the lot with your payment. Depending on how the financing is structured, you may be required to make weekly or bi-monthly payments. If you have a checking account and the lot offers automatic payments, sign up for them so you won't have to worry about it.
At most BHPH lots, you won't pay any less if you pay the loan off early. Ask about this when you buy the car. If the lot is reporting to the credit bureau and you won't save any money by paying the loan off early, just keep making the payments on time. All those payments will reflect well on your credit score.
You’ve found the car of your dreams. Now what do you do? How do you get the money for it? When an individual decides to buy a new or used car, he or she often needs to finance part of or all of the vehicle’s price. Because cars are such a big purchase, many buyers can't provide cash down for the vehicle, so they choose to finance a car over a period of time. There are two financing routes you can choose to go down — either getting a direct or a dealer loan. Before you choose to finance your next vehicle, you should do your homework to ensure that you get the best deal.
Method 1 Doing Your Homework.
Find out how much you can afford up front. If you know the ballpark value of what you want to pay for a vehicle, and how much you can afford to pay in cash, you will know about how much you will need to finance.
Maximize your down payment. A smart way to finance a car is to get as much of a down payment as you can. The more you can pay at the beginning of a deal, the less you will have to pay in interest. Even if you have to temporarily sell some assets to buy the car outright, that can be a better deal than financing a major portion of the cost.
Know your credit score. Much of the financing offer for a car is based on your credit score. Those with good credit will get better interest rates and cheaper car financing offers. This is important no matter who you finance your vehicle through.
Find out your credit score either through the dealer or online at websites like www.annualcreditreport.com, www.freecreditscore.com, www.creditkarma.com, or www.myfico.com.
If your credit score is higher than 680, you are considered a prime borrower and are eligible for the best interest rates available. The higher your score, the better bargaining position you will be in.
Compare loan rates online. There are many websites that compare deals at no cost. Additionally, it is a great way to get in contact with various companies.
Get the necessary materials together. Most lenders will want your name, social security number, date of birth, previous and current addresses, occupation, proof of income, and information on other outstanding debts.
Method 2 Getting a Direct Loan.
Contact certified lenders. Local and national banks, as well as credit unions can give you the terms and interest rates they are offering on used car loans over the phone and online. Shop around and find the best rate for you. You don't have to apply for financing through the dealer, though you certainly can. Oftentimes you can get a fairer deal when you figure out your financing first before you walk into the dealership. Apply for financing through a bank or an app that connects you to lenders.
Oftentimes, credit unions have the lowest interest rates, especially if you are a member. Check with your employer to see if they have any connections with local credit unions for you to take advantage of.
Many lenders offer 5 year loans on vehicles that are five years old at most. Older vehicles are often only eligible for 1 to 2 year loans. In many cases, the fear is that an older car will break down and then borrowers will default on their loans.
Additionally, lenders often impose mileage restrictions (often 100,000 miles) and will not finance salvage-titled vehicles. Typically, they will only fund loans for vehicles purchased through a franchised dealership, not through a private party or independent dealer. In these cases, you’ll have to get a deal loan. See below.
Solicit rate quotes from several lenders. The interest rates offered on used car loans are generally 4 to 6 percent higher than rates offered on new car loans. This is because lenders are fearful of financing used vehicles.
Be as specific as possible with a lender. Provide the lender with information about the vehicle you choose. You will need to provide the car's make, model and VIN number, among other things. The more detail you can give the lender, the more firm your rate quote will be.
Talk to lenders about any fees or extra charges. Some lenders offer low interest rates and make back the money by tacking on additional fees and charges to a loan deal. You'll want to know about these, as well as any other specific loan agreement aspects like prepayment penalties, which can trigger fees if you pay the loan off early.
Get prequalified. Fill out the paperwork ahead of time. Many banks or lenders will pre-qualify you for a car loan based on your credit score, the type of car you plan on purchasing, and your driving history.
Ask the lender with the best rate offer for a pre-qualification letter. It should outline the terms and conditions of the loan. Bring this letter with you to the dealership when shopping for the car. When you go to the dealer's lot, you can show them evidence pre-qualification from a reputable lender. This will expedite the car buying experience. It will also tell the car dealer you are ready to buy.
If you haven’t prequalified, you can get financing at the dealer's lot for a one-stop shopping experience, but having other lender alternatives helps you to get the best deal.
Method 3 Getting a Dealer Loan.
Get a loan through a new or used car dealer.
In general, interest rates offered by dealerships are higher than interest rates you can find directly from a lender. In many cases, smaller dealerships work with third party lenders to finance your vehicle. Because they play the middleman, they pass off the costs to you. Therefore, you may want to apply for a direct loan first and cut out the dealership middleman.
In some cases, financing lenders like local banks and credit unions won’t take a chance on used cars. For used cars, most dealers will finance used cars they sell, regardless of its age. Therefore, you may want to apply for a dealer loan if a direct lender denies you financing.
Bring leverage. Bring interest rates from direct loan lenders, even if you plan on financing with the dealer. Dealers are more likely to offer lower interest rates, if you show them that you know what other lenders are offering. Make sure you research competitive interest rates based on your credit score.
Offer a down payment in cash or trade equivalent to at least 10% of the vehicle's purchase price. The larger the down payment, the less money you will have to finance and the less interest you’ll have to pay on that loan.
Tips.
If you have a low credit score, consider asking someone with a high credit score to co-sign on a loan. A co-signor with a high credit score may help you to secure a lower-interest loan.
If your loan application gets rejected, don’t feel bad. Most likely, the lender doesn’t think you are able to pay back the loan on time. Reassess your budget and try again or try a different lender.
Warnings.
If you finance a used car, be prepared to pay for comprehensive insurance on the vehicle, which is more expensive than collision insurance commonly applied to used cars. Lenders require that you carry comprehensive insurance to protect their investment. Lenders often fear that if you damage the car, you will default on the loan, so they make you take out better insurance.
Be wary of dealers who advertise financing with "no credit check." Typically, these car lots sell high-mileage vehicles with inflated down payments and interest rates.
If you need a car and can't afford to buy one with cash, financing is always an option. If you want to finance a used car, you have the choice of getting your own direct financing, or having the dealer obtain financing for you. If you have a low credit score, "Buy Here Pay Here" lots may be your only option, but should only be used as a last resort.
Method 1 Getting a Direct Loan.
1. Request a copy of your credit report. Knowing your credit score will give you a good idea of what kind of rates and terms you'll potentially be offered. In the United States, you're entitled to one free copy of your credit report every year.
Check your report for errors or inaccuracies that could be affecting your credit score.
If you have a credit score of 680 or above, you're a prime borrower and should be able to get the best possible rates. The higher your score, the lower the rate you can potentially negotiate with lenders.
2. Contact local banks and credit unions. If you have had a credit or savings account with the same bank for a number of years, start there when looking for a direct car loan. Your history as a customer may get you better rates.
Branch out to other banks in your area. Credit unions often have more forgiving loan terms and fewer restrictions.
Banks typically won't do a direct car loan for a car purchased from a private owner or an independent dealership. In those situations, you may need to try to take out a personal loan. This is also true if you're buying a collector or exotic car.
3. Try online lenders. If you're not a prime borrower, it's still possible to get a direct loan for a used car. There are a number of online lenders who are willing to finance used cars for people with less than stellar credit.
Since online lenders have less overhead, they typically will offer you a lower rate than you could get from a brick-and-mortar bank or credit union.
These loans may come with more restrictions than the direct loan you could get from a bank with better credit. For example, they may not finance cars more than five years old, or cars with over 100,000 miles.
4. Get rates from multiple lenders. Before you choose a loan, apply for several so you can compare the rates offered. Many banks and lending companies have a pre-approval process that won't affect your credit.
Multiple offers may give you the opportunity to negotiate for a better deal. For example, if you got a better rate from a different bank than from your own bank, you could get your bank to match that rate to get your business.
5. Complete a loan application. Once you've decided which lender you want to use for your financing, you'll typically have to fill out a full loan application. Many lenders give you the option to complete the application online.
You'll need to provide basic identification information, such as your driver's license and Social Security numbers. You also may need to provide basic financial information regarding your income and debts.
If you've had some credit problems in the past, you may want to go into a bank and apply for the loan in person so you can talk to a lending agent.
Your loan agreement will include basic requirements that the car must meet. As long as the car meets these requirements, you can use the financing to purchase the car.
6. Negotiate with the dealer. In most cases, you're going to secure direct or "blank check" financing before you find the specific car you want to buy. Having financing already secured puts you in a stronger position to get the best price from the dealer.
When you bring your own financing, you're saving the dealer a lot of costs. Ask if there's a discount available for that.
Since you're buying a used car, have it inspected before you buy it and go over the car's history. The car is a better buy if it's had fewer owners and never been in an accident.
7. Give the dealer your blank check. Lender policies vary, but in most cases you'll get a check for the exact amount of your car, or a blank check that's worth any amount up to the maximum amount your lender has approved.
When you buy a car using direct financing, you still must maintain full coverage insurance on the car. Your loan agreement will include information on the minimum amounts of coverage you must maintain.
Method 2 Using Dealer Financing.
1. Research interest rates. Dealers have special financing offers available throughout the year. Especially if you're not picky about the make or model of your car, shop around and see who has the best deal.
Know your credit score and how qualified you are for different offers. Typically the best offers are only available for prime borrowers with credit in the 700s or higher.
If you're trading in an old car, look for dealer offers to double the price on a trade-in, or pay a minimum amount for any trade-in regardless of its condition.
2. Choose your car. If you've done your research, you have a few dealerships in mind. You should be able to evaluate their inventory online before you go visit in person. Find the best car for you, looking at overall price.
Dealers may advertise monthly payment amounts rather than total price. This can be a way to charge you a higher interest rate.
Dealers typically will finance any car on their lot, so you may have more variety to choose from if you use dealer financing than you would if you used direct financing. However, this might not necessarily be a good thing – you still need to check the car's history and have it inspected before you buy.
3. Offer a sizable down payment. Cars depreciate in value. If you're buying a used car, you want to finance as little of the total price of the car as possible. A down payment of 10 to 20 percent of the purchase price of the car typically will get you the best rates.
A sizable down payment can help you avoid being underwater on your loan – meaning you owe more for the car than it is worth. This is particularly important to avoid when you're financing a used car, which could develop mechanical problems relatively quickly.
4. Apply for financing through the dealer. You'll need basic identification information as well as information about your income and employment to complete the financing application at the dealership.
It may take a few minutes, but in most cases the dealer will have a financing offer available for you that day. Then they'll call you back into an office to discuss the terms you've been offered.
The finance company may require additional documents from you, such as pay stubs to verify income. If the dealer mentions any of these, make sure you get copies to the dealer as soon as possible so as not to jeopardize your financing offer.
5. Negotiate the deal. If you've done your research and know your credit score, you may be able to get better terms from the dealer than what you're initially offered. Review each term and see if you can improve it.
For example, you typically want the shortest term loan, since it will usually have the lowest interest rates. But dealers often focus on the amount of the monthly payment. Financing for a shorter term does mean a higher monthly payment, but it will save you money overall.
6. Use cash for extras. Dealers tend to tack on extra fees, including sales tax, registration fees, and document or destination fees. You also may end up paying extra for dealer warranties, especially for a used car.
The dealer typically has no problem rolling these extra fees into your financing, but there's no point in paying interest on fees and tax. Pay that out of pocket if you can.
Method 3 Using "Buy Here Pay Here" Financing
1. Exhaust all other options. If you need a car and have had credit problems or have an extremely low credit score, BHPH financing is available for you. However, due to the high rates you should consider this only as a last resort.
There are some franchised dealerships, particularly Ford and Chevy dealerships, who are willing to work with customers who have bad credit. It may be possible for you to get a loan there. It wouldn't be the best rates, but it you would still pay less than you would at a BHPH lot.
If you have a relative with a good credit score, you might find out if they are willing to co-sign on the loan with you. That could get you a better rate or make traditional lenders more willing to work with you. This option can be especially valuable if you're young and don't have much, if any, credit history.
2. Ask if the dealer reports to credit bureaus. Because BHPH lots finance the car themselves, they don't always report to credit bureaus. If you have bad credit or no credit, you want the payments you make for your car reported so you can start to rebuild your credit.
You may have to visit several lots before you find one that reports to credit bureaus, but be persistent.
3. Research the car thoroughly. Any car you buy from a BHPH lot typically is sold "as is." Some of these cars may have mechanical problems, and the lot may not be required to disclose those problems before you buy the car.
Demand a Carfax or similar car history report so you can see how many owners the car has had and whether it's been in an accident. These lots typically have older cars, so they've likely had several owners – but a car that's changed hands several times in the past few years may be a red flag.
Take the car to a reputable mechanic before you buy it and have them conduct a thorough inspection. If there are any major repairs that need to be made, you may be able to convince the lot to make those repairs before you purchase the car.
4. Negotiate with the dealer. BHPH dealers often present the price of a car – and the financing terms – as though they are non-negotiable, but that's typically not true. Even though you may not be in the best bargaining position, you can still try to get a better deal.
The more of a down payment you can make, the better your terms typically will be. These lots often specialize in low down payments, but that doesn't mean you can't pay more.
If you're buying a car at a BHPH lot, your down payment should be as high as possible to keep you from ending up underwater – try to aim for somewhere between 40 and 60 percent down.
5.
Make your payments on time. You typically won't have to make payments for a long term, but it's essential to make every payment on time if you want to rebuild your credit. Some BHPH lots will repossess a car after as few as one missed payment.
Some BHPH lots require you to make a trip to the lot with your payment. Depending on how the financing is structured, you may be required to make weekly or bi-monthly payments. If you have a checking account and the lot offers automatic payments, sign up for them so you won't have to worry about it.
At most BHPH lots, you won't pay any less if you pay the loan off early. Ask about this when you buy the car. If the lot is reporting to the credit bureau and you won't save any money by paying the loan off early, just keep making the payments on time. All those payments will reflect well on your credit score.
How to Calculate Finance Charges on a New Car Loan.
While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.
Part 1 Clarifying the Terms of Your Loan.
1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.
This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.
2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.
Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.
3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.
Part 2 Calculating Your Monthly Finance Charges.
1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.
2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.
3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.
4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.
The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).
In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):
Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.
Monthly payment = $140/(1-(1.007)^-60).
Monthly payment = $140/(1-0.658).
Monthly payment = $140/0.342.
Monthly payment = $409.36 (this number may be off by a few cents due to rounding).
5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.
6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.
Part 3 Calculating Your Loan's Total Finance Charges.
1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.
2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.
So, in our example, this would be.
$409 x 60 - $20,000 = Total amount of finance charges.
$24,540 - $20,000 = Total amount of finance charges.
Total amount of finance charges = $4,540.
3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.
Tips.
Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.
Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.
The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.
With good credit and a large down payment, it may be possible to get a car loan with 0% APR.
Warnings.
While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.
How to Calculate Finance Charges on a New Car Loan.
While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.
Part 1 Clarifying the Terms of Your Loan.
1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.
This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.
2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.
Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.
3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.
Part 2 Calculating Your Monthly Finance Charges.
1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.
2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.
3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.
4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.
The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).
In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):
Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.
Monthly payment = $140/(1-(1.007)^-60).
Monthly payment = $140/(1-0.658).
Monthly payment = $140/0.342.
Monthly payment = $409.36 (this number may be off by a few cents due to rounding).
5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.
6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.
Part 3 Calculating Your Loan's Total Finance Charges.
1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.
2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.
So, in our example, this would be.
$409 x 60 - $20,000 = Total amount of finance charges.
$24,540 - $20,000 = Total amount of finance charges.
Total amount of finance charges = $4,540.
3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.
Tips.
Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.
Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.
The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.
With good credit and a large down payment, it may be possible to get a car loan with 0% APR.
Warnings.
While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.
How to Calculate Finance Charges on a Leased Vehicle.
At some point, you may want or need to have a new car. You may also want to weigh the cost differences between leasing and buying before you make your decision. One way to compare costs is to figure out exactly what you will be paying for each. When you buy a car, you finance the amount charged for the vehicle and the interest rate is clear. When you lease a car, you pay to use the vehicle for a period of time, similar to renting it, and turn it in at the end of the lease. The finance charges for a lease may not always be clear. To calculate the finance charges on a leased vehicle, you need to know only a few things: the net capitalized cost, residual value and money factor. If these are known, calculating your finance charges is a simple process.
Part 1 Collecting Necessary Data.
1. Determine the net cap cost. The term “net cap cost” is a shortened form of net capitalized cost. This is ultimately the overall price of the vehicle. The net cap cost may be affected by other additions or subtractions, as follows.
Any miscellaneous fees or taxes are added to the cost to increase the net cap cost.
Any down payment, trade in or rebates are considered “net cap reductions.” These are subtracted and will reduce the net cap cost.
Suppose, for example, that a vehicle is listed with a cost of $30,000. There is a rebate or you make a down payment of $5,000. Therefore, the net cap cost for this vehicle is $25,000.
2. Establish the residual value of the vehicle. This is a bit like predicting the future. The residual value is the vehicle’s value at the end of the lease, when you will return it. This is always a bit uncertain because nobody can predict the exact condition of the vehicle, the mileage or the repairs that it will undergo during the lease. To establish the residual value, dealers use industry guide books, such as the Automotive Leasing Guide (ALG).
The graphic shown above illustrates the decline in the vehicle’s value over time. For this example, the residual value at the end of the term is set at $15,000.
Some dealers choose not to use the ALG. Instead, they may develop their own guide or functions for setting residual values.
3. Find out the dealer’s money factor. Leased vehicles do not charge interest in the same way that purchase agreements do. There is, however, a finance charge that is analogous to interest. You are paying the leasing company for the use of their vehicle during the term of your lease. This charge is based on a number called the “money factor.”
The money factor is not generally publicized. You will need to ask the dealer to share it with you.
The money factor does not look like an interest rate. It will generally be a decimal number like 0.00333. To compare the money factor to an annual interest rate, multiply the money factor by 2400. In this example, a money factor of 0.00333 is roughly like a loan interest rate of 0.00333x2400 = 7.992% interest. This is not an exact equivalence but is a regularly accepted comparison value.
Part 2 Performing the Calculations.
1. Add the net cap cost and the residual value. The finance charge is based on the sum of the net cap cost and the residual value. At first glance, this appears to be an unfair doubling of the car’s value. However, in combination with the money factor, this works as a way to average the net cap cost and the residual value. You end up paying the finance fee on an average overall value of the car.
Consider the example started above. The net cap cost is $25,000, and the residual is $15,000. The total, therefore, is the sum of $25,000+$15,000 = $40,000.
2. Multiply that sum by the money factor. The money factor is applied to the sum of the net cap cost and the residual value of the car to find the monthly finance charge.
Continuing with the example above, use the money factor 0.00333. Multiply this by the sum of the net cap cost and residual as follows:
$40,000 x 0.00333 = $133.2.
3. Apply the monthly finance charge. The result of the final calculation is the monthly finance charge that will be added to your lease payment. In this example, the finance charge is $133.20 each month.
4. Figure the full monthly payment. The finance charge may be the largest portion of your monthly payment, but you cannot count on it to be the full payment. In addition to the finance charge, many dealers will also charge a depreciation fee. This is the cost that you pay to compensate the dealer for the decreased value of the car over time. Finally, you may be responsible for assorted taxes.
Before you sign any lease agreement, you should find out the full monthly charge you are responsible for. Ask the dealer to itemize all the costs for you, and make sure that you understand and can afford them all.
Part 3 Negotiating with the Dealer.
1. Ask for the data you want. Many people, when leasing a vehicle, seem satisfied to accept the bottom line figure that the dealer assigns. However, to verify that any deal you negotiate is actually honored, you need to know the details of the finance charge calculations. Without asking for the data, you could be the victim of carelessness, simple error, or even fraud.
You could negotiate a reduced price for the vehicle, but then the dealer could base the calculations on the original value anyway.
The dealer might not apply proper credit for a trade-in vehicle.
The dealer could make mathematical errors in calculating the finance charge.
The dealer could apply a money factor other than the one used in the original negotiations.
2. Press the dealer for the “money factor.” The money factor is a decimal number that car dealerships use to calculate the finance charges. This number is not an interest rate but is somewhat analogous to interest rates. Some lease dealers may publicize the money factor, while others may not. You should ask for the money factor that your dealer is using. Also ask how the money factor is used to calculate the finance fee charged on your lease.
3. Ask the dealer to show you the calculation worksheet. The dealer is not required to share with you the calculations that go into the finance charge and monthly payments on your leased vehicle. Unless you ask specifically, you will probably never see that information. You should ask the dealer, sales clerk or manager to share the calculations with you. Even if you have the individual bits of data, you may not be able to confirm that the figures were calculated accurately or fairly unless you compare your notes to the dealer’s calculations.
4. Threaten to leave if the dealer is not forthcoming with information. The only leverage you have in the negotiations over a leased vehicle’s finance charges is the ability to walk away. Make it clear to the dealer that you want to verify the calculations and the individual pieces of information that go into figuring your finance charges. If the dealer is unwilling to share this information with you, you should threaten to leave and lease your car from somewhere else.
Tips.
If the lease dealership will not provide you with the money factor, go to a different dealer. You cannot determine and compare your true costs and fair value unless you have this information.
The higher the car value at lease end (that is, less depreciation), the less your finance charges will be, which, in turn, will reduce your monthly payment.
Warnings
Some dealers may present the money factor number so that it is easier to read, such as 3.33; however, this could be misinterpreted as the interest rate. Be aware that this is not the rate that will be used. This number should be converted to the actual money factor by dividing by 1,000 (3.33 divided by 1,000 = 0.00333).
Be aware that the finance cost (as calculated here to be $133.20) is not necessarily your total monthly payment. It is only the finance charge and may not include other charges such as sales tax or the acquisition fee.
Things You'll Need : Net cap cost, Residual cost, Money factor, Paper, Pen or pencil, Calculator.
How to Calculate Finance Charges on a Leased Vehicle.
At some point, you may want or need to have a new car. You may also want to weigh the cost differences between leasing and buying before you make your decision. One way to compare costs is to figure out exactly what you will be paying for each. When you buy a car, you finance the amount charged for the vehicle and the interest rate is clear. When you lease a car, you pay to use the vehicle for a period of time, similar to renting it, and turn it in at the end of the lease. The finance charges for a lease may not always be clear. To calculate the finance charges on a leased vehicle, you need to know only a few things: the net capitalized cost, residual value and money factor. If these are known, calculating your finance charges is a simple process.
Part 1 Collecting Necessary Data.
1. Determine the net cap cost. The term “net cap cost” is a shortened form of net capitalized cost. This is ultimately the overall price of the vehicle. The net cap cost may be affected by other additions or subtractions, as follows.
Any miscellaneous fees or taxes are added to the cost to increase the net cap cost.
Any down payment, trade in or rebates are considered “net cap reductions.” These are subtracted and will reduce the net cap cost.
Suppose, for example, that a vehicle is listed with a cost of $30,000. There is a rebate or you make a down payment of $5,000. Therefore, the net cap cost for this vehicle is $25,000.
2. Establish the residual value of the vehicle. This is a bit like predicting the future. The residual value is the vehicle’s value at the end of the lease, when you will return it. This is always a bit uncertain because nobody can predict the exact condition of the vehicle, the mileage or the repairs that it will undergo during the lease. To establish the residual value, dealers use industry guide books, such as the Automotive Leasing Guide (ALG).
The graphic shown above illustrates the decline in the vehicle’s value over time. For this example, the residual value at the end of the term is set at $15,000.
Some dealers choose not to use the ALG. Instead, they may develop their own guide or functions for setting residual values.
3. Find out the dealer’s money factor. Leased vehicles do not charge interest in the same way that purchase agreements do. There is, however, a finance charge that is analogous to interest. You are paying the leasing company for the use of their vehicle during the term of your lease. This charge is based on a number called the “money factor.”
The money factor is not generally publicized. You will need to ask the dealer to share it with you.
The money factor does not look like an interest rate. It will generally be a decimal number like 0.00333. To compare the money factor to an annual interest rate, multiply the money factor by 2400. In this example, a money factor of 0.00333 is roughly like a loan interest rate of 0.00333x2400 = 7.992% interest. This is not an exact equivalence but is a regularly accepted comparison value.
Part 2 Performing the Calculations.
1. Add the net cap cost and the residual value. The finance charge is based on the sum of the net cap cost and the residual value. At first glance, this appears to be an unfair doubling of the car’s value. However, in combination with the money factor, this works as a way to average the net cap cost and the residual value. You end up paying the finance fee on an average overall value of the car.
Consider the example started above. The net cap cost is $25,000, and the residual is $15,000. The total, therefore, is the sum of $25,000+$15,000 = $40,000.
2. Multiply that sum by the money factor. The money factor is applied to the sum of the net cap cost and the residual value of the car to find the monthly finance charge.
Continuing with the example above, use the money factor 0.00333. Multiply this by the sum of the net cap cost and residual as follows:
$40,000 x 0.00333 = $133.2.
3. Apply the monthly finance charge. The result of the final calculation is the monthly finance charge that will be added to your lease payment. In this example, the finance charge is $133.20 each month.
4. Figure the full monthly payment. The finance charge may be the largest portion of your monthly payment, but you cannot count on it to be the full payment. In addition to the finance charge, many dealers will also charge a depreciation fee. This is the cost that you pay to compensate the dealer for the decreased value of the car over time. Finally, you may be responsible for assorted taxes.
Before you sign any lease agreement, you should find out the full monthly charge you are responsible for. Ask the dealer to itemize all the costs for you, and make sure that you understand and can afford them all.
Part 3 Negotiating with the Dealer.
1. Ask for the data you want. Many people, when leasing a vehicle, seem satisfied to accept the bottom line figure that the dealer assigns. However, to verify that any deal you negotiate is actually honored, you need to know the details of the finance charge calculations. Without asking for the data, you could be the victim of carelessness, simple error, or even fraud.
You could negotiate a reduced price for the vehicle, but then the dealer could base the calculations on the original value anyway.
The dealer might not apply proper credit for a trade-in vehicle.
The dealer could make mathematical errors in calculating the finance charge.
The dealer could apply a money factor other than the one used in the original negotiations.
2. Press the dealer for the “money factor.” The money factor is a decimal number that car dealerships use to calculate the finance charges. This number is not an interest rate but is somewhat analogous to interest rates. Some lease dealers may publicize the money factor, while others may not. You should ask for the money factor that your dealer is using. Also ask how the money factor is used to calculate the finance fee charged on your lease.
3. Ask the dealer to show you the calculation worksheet. The dealer is not required to share with you the calculations that go into the finance charge and monthly payments on your leased vehicle. Unless you ask specifically, you will probably never see that information. You should ask the dealer, sales clerk or manager to share the calculations with you. Even if you have the individual bits of data, you may not be able to confirm that the figures were calculated accurately or fairly unless you compare your notes to the dealer’s calculations.
4. Threaten to leave if the dealer is not forthcoming with information. The only leverage you have in the negotiations over a leased vehicle’s finance charges is the ability to walk away. Make it clear to the dealer that you want to verify the calculations and the individual pieces of information that go into figuring your finance charges. If the dealer is unwilling to share this information with you, you should threaten to leave and lease your car from somewhere else.
Tips.
If the lease dealership will not provide you with the money factor, go to a different dealer. You cannot determine and compare your true costs and fair value unless you have this information.
The higher the car value at lease end (that is, less depreciation), the less your finance charges will be, which, in turn, will reduce your monthly payment.
Warnings
Some dealers may present the money factor number so that it is easier to read, such as 3.33; however, this could be misinterpreted as the interest rate. Be aware that this is not the rate that will be used. This number should be converted to the actual money factor by dividing by 1,000 (3.33 divided by 1,000 = 0.00333).
Be aware that the finance cost (as calculated here to be $133.20) is not necessarily your total monthly payment. It is only the finance charge and may not include other charges such as sales tax or the acquisition fee.
Things You'll Need : Net cap cost, Residual cost, Money factor, Paper, Pen or pencil, Calculator.
Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.
Method 1 Reducing Finance Charges for a New Loan.
1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.
Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.
If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.
Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.
2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.
3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.
4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.
5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.
the lease costs at the beginning, middle, and end of the leasing period.
what leasing offers and terms are available to you.
how long you want to keep the automobile.
Method 2 Refinancing an Existing Loan.
1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.
2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:
your current interest rate.
how much money is still owed on the existing loan.
how many months remain in the existing loan's terms.
the make, model, and current odometer reading of your vehicle.
the current value of your vehicle.
your current income and employment history.
your current credit score.
3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:
the loan rate.
the duration of the loan.
whether there are pre-payment penalties or late payment penalties.
any fees or finance charges.
what (if any) the conditions for automobile repossession are with a given lender.
Method 3 Pre-paying an Existing Loan.
1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.
2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.
3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:
the total number of months in your existing loan term.
the number of months remaining on your existing loan.
the amount your existing loan was for.
the monthly payments remaining on your loan.
the current annual interest rate (APR) on your existing loan.
Tips.
Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.
Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.
Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.
Method 1 Reducing Finance Charges for a New Loan.
1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.
Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.
If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.
Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.
2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.
3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.
4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.
5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.
the lease costs at the beginning, middle, and end of the leasing period.
what leasing offers and terms are available to you.
how long you want to keep the automobile.
Method 2 Refinancing an Existing Loan.
1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.
2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:
your current interest rate.
how much money is still owed on the existing loan.
how many months remain in the existing loan's terms.
the make, model, and current odometer reading of your vehicle.
the current value of your vehicle.
your current income and employment history.
your current credit score.
3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:
the loan rate.
the duration of the loan.
whether there are pre-payment penalties or late payment penalties.
any fees or finance charges.
what (if any) the conditions for automobile repossession are with a given lender.
Method 3 Pre-paying an Existing Loan.
1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.
2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.
3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:
the total number of months in your existing loan term.
the number of months remaining on your existing loan.
the amount your existing loan was for.
the monthly payments remaining on your loan.
the current annual interest rate (APR) on your existing loan.
Tips.
Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.
Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.
Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, and where and when to invest. By following some basic steps for doing these things, as well as saving for emergencies and retirement and insuring the assets you’ve worked hard to obtain, you can begin to understand your personal finances and become more confident in your ability to make good decisions regarding them.
Learning How to Create a Budget.
Gather your financial statements and information. Creating a budget is one of the most important aspects of personal finance. A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns. To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.
Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are. The more detail you can provide, the better your budget will be.
Record your monthly income. After gathering all of your financial data, separate out your sources of income. Record the amount of income you bring home in a month. Be sure to include any side jobs you have.
If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so.
List your fixed monthly expenses. Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.
Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage.
List your variable monthly expenses. You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies. These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.
Variable expenses can include things like groceries, gasoline, gym memberships, and eating out.
Total your monthly income and expenses. Once you have recorded all of your income and expenses, both fixed and variable, total each category. Ultimately, you want your income to be larger than your expenses. If it is, you can then decide where it is best for you to spend your excess income. If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending or increase your income.
Adjust your variable expenses to hit your goal. If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.
For example, if you are eating out four nights a week, you may have to cut this back to two nights a week. This will free up money you can put toward essential expenses like college loans or credit card debt.
In addition, you may be paying unnecessary monthly fees, like overdraft or late fees. If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.
Alternatively, you can work on earning more instead of spending less. Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month.
Review your budget every month. At the end of each month, take some time and review your spending over the past month. Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most. Reviewing your budget can also be encouraging if you find you are sticking to it. You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.
Strategizing to Pay Down Debt..
Pay more than the minimum amount due each month. Even following a strict budget doesn’t mean you can totally avoid debt. Large purchases, like cars, school, and houses often require you to take out a significant loan. In addition, it can be easy to rack up credit card debt quickly. One of the personal finance basics you must understand is how to take care of this debt as quickly as possible. The first step to doing this is to pay more than the minimum payment as often as you can.
For example, say the minimum payment on your car loan is $50 a month. Paying even $60 a month toward this loan can help you pay it off sooner and cut down on the amount you pay in finance charges over time. The more you can pay above the minimum, the better.
Transfer credit card balances with high annual percentage rates. If you have a credit card for which you are paying a high annual percentage rate (APR), it might be a good idea to look into transferring this balance to a credit card that offers a lower APR or no APR for a certain amount of time. This way, your entire payment will be applied to your balance, not interest.
Read the fine print before transferring a balance. Most cards charge a transfer fee (3% of the balance, for example) and only offer 0% APR for a limited amount of time (12 or 18 months, for example). Make sure you understand the terms of your new agreement and shop around for the best option before transferring your balance.
Calculate the amount of debt on each credit card. If you have multiple credit cards, compare the amount of debt you have on each one. You can use this information in two different ways:
Some people believe paying off the credit card with the smallest balance first is best. The idea here is that getting the smaller amount of debt paid off will motivate you and allow you to focus on your remaining debt.
Alternatively, some people believe you should focus on paying off the largest balance because you will be paying the most in interest on this balance. To do this, you would try to make more than the minimum payment on this balance, while paying only the minimum on your smaller balance.
If possible, the best solution is to pay more than the minimum simultaneously on each balance.
Dedicate excess funds toward paying off debt. Once you are able to follow your monthly budget, dedicate any extra funds you have at the end of the month toward paying down your debt. It can be tempting to use this money to treat yourself to a fancy dinner or a new TV, but remember your long-term goals before doing this. In the long run, paying down debt will serve you better than treating yourself to something unnecessary.
Consolidate your debt. If you have multiple credit card accounts, student loans, a mortgage, a car loan, or any combination of these debts, consolidating them into one payment may help you manage them more easily. Typically, when you consolidate debt, you’ll get a debt consolidation loan. These loans usually have a lower interest rate and require lower monthly payments.
While consolidating your debt can make it easier to manage, it may also increase the amount you’ll pay in the long run because it extends your payments over a longer period of time.
If your credit score is not good, you may need a co-signer to be able to get a debt consolidation loan.
You can also consolidate your credit card debt by transferring all of your balances to a 0% APR credit card. If you think you can pay off your debt within 12 to 18 months, this might be a good option. However, if you think it will take you significantly longer to pay it off, this might not be a good option because the 0% APR is usually only good for 12 to 18 months.
Refinance your loans. Refinancing is generally a good option if your financial situation has improved since taking out your loan. Similar to consolidating your debt, refinancing your loans also consolidates your debts and may allow you to make lower monthly payments on your loans. Refinancing might also allow you to shorten the term of your loan to pay off your debts more quickly. In addition, depending on your financial situation, you may also be eligible for a lower interest rate.
Choose a student loan repayment plan. If you can afford it, the standard repayment plan is your best option for repaying federal loans. A standard plan requires you to pay the same amount every month over a ten year period. If you can’t afford the payments on a standard plan, however, the government offers two alternative categories of plans—income-driven and basic.
Income-driven repayment plans extend the terms of your loan to 20 or 25 years and require you to pay a certain percentage of your income toward your loan each month, rather than a fixed monthly payment. In addition, any amount still owed at the end of your loan term is forgiven.
Basic plans include standard, graduated, and extended repayment options. Standard is the best option if you can afford it, but graduated or extended plans may be right in some situations. Graduated plans start you off with low payments and gradually increase them over time. This plan can be good if you expect to make more money over the years. Extended plans extend the terms of your loan to 25 years, allowing you to make smaller payments each month, but pay more in interest over time.
Saving for Emergencies and Retirement.
Set up automatic deposits. It can be tough to commit to putting money into your savings account every month, but it is important to do so to ensure you have enough money for emergencies and for your future. If possible, make automatic payments into a saving account each month.
For example, set your bank account so it automatically transfers $50 from your checking account to savings account at least once a month.
Or, if your paycheck gets deposited directly into your account, you can usually set it up so that a certain portion (either a dollar amount or a percentage) is deposited straight into your savings account. Most professionals recommend putting 10 to 20 percent of your income towards savings each month.
Contribute to a retirement savings plan. You should start saving for retirement as soon as possible to ensure you’ll have enough money to live comfortably when you are done working. The amount you need to contribute to this savings account monthly depends on a number of different factors, like when you start saving, how much you are starting with, and whether or not you’re going to receive any kind of employer contribution.
Many employers offer a 401k, or a retirement savings plan, of some kind to their employees. A lot of companies will also match a percentage of the employee’s contributions into this account over time. If your employer offers a plan of this sort, start contributing to it as soon as you can, even if it is just a small amount.
If you are self-employed or your employer does not offer any kind of retirement savings plan, you can set up your own plan through investment websites or many banks.
Consult a financial advisor to figure out how much you should be putting away for retirement to reach your goals.[19]
Build an emergency fund. In addition to saving for retirement, you also need to save for emergencies, like losing a job, costly car repairs, or unexpected medical expenses. You can use your bank’s savings account for this emergency fund.
Financial professionals recommend you have enough in your savings account to cover a month and a half of living expenses for each person you claim as a dependent. For example, if you are married with one child, you should have enough to cover four and a half months of living expenses.
Investing for Beginners.
Invest in a Target Date Fund (TDF). Figuring out where to invest your money is one of the hardest parts of personal finance basics. Essentially, you want to invest in a variety of stocks, bonds, and treasuries—but which ones? Target Date Funds make this a little easier for you. A TDF is basically a hands-off retirement account. You enter the age you want to retire and the TDF will automatically spread the money you put into this account across a wide variety of stocks, bonds, and treasuries.
Some of the recommended companies through which to do this are Vanguard, Fidelity, and T. Rowe Price.
Diversify your investments. If you choose a more hands-on approach to investing, it is important to diversify your portfolio to reduce risk. Diversifying means that you choose a variety of stocks, bonds, and treasuries in which to invest. You should make sure your investments are spread over a number of different companies and industries. This way, if one company or industry suffers a financial downturn, you will only lose a portion of your investment, not the whole thing.
Invest in your 401k. As mentioned above, investing in a 401k provided by your company is a good idea. There are a couple really good things about this option. First of all, most of the time, the money you put into a 401k is deferred on your taxes until you take it out of the account. Some 401ks are taxed before investing, however, so check with your employer to find out which one you have. Second, your employer will often match the amount of money in your 401k (up to a certain amount) so you are, essentially, getting free money just for investing.
You should invest in a company match 401k even if you are in debt. The return you receive on this type of investing is often more than what your debt is.
The amount of money your company will match often depends how much you invest in your 401k. Usually, you have to hit certain investment thresholds, which will then determine the percentage your company will match.
Invest in a Roth IRA. Another investment opportunity offered by many employers is a Roth IRA. In a Roth IRA, you pay taxes up front on your investment. Investing in a Roth IRA is an especially good idea for young people with low incomes, considering the tax rate will likely increase in their lifetime. This type of investment can be very helpful because it will provide you with a pot of money for your retirement that won’t shrink due to taxes.]
Understanding Why to Insure Your Investments.
Get property insurance. You should invest in property insurance to protect your home, which is often one of your biggest assets. Property insurance is actually required if you have a mortgage. This type of insurance will protect you from having to pay out-of-pocket for any major unforeseen home repairs.
If you rent, it is just as important to invest in renter’s insurance. Your belongings can add up to a significant investment and getting renter’s insurance will help protect you in the event of a burglary, fire, flood, or other disaster.
Buy life insurance. Getting life insurance is especially important if you have a family or are married. Life insurance makes sure your income (or at least part of it) is supplemented in the event that you pass away. This is important because your family could face very tough financial situations if they are unable to make up for the portion of income you brought to the table.
Get health insurance. Health insurance premiums can be a small price to pay if you find yourself sick or seriously injured. Medical bills alone can put you in serious debt if you don’t have some sort of insurance policy. In addition, you’ll likely miss a significant amount of work if you are seriously injured, leaving you no way to pay these bills.
Many employers offer health insurance to their employees at a discounted rate. Usually only full-time employees are eligible to receive health insurance through the company, but some companies may offer it to part-time employees as well.
Buying health insurance independently, without the help of an employer, can be expensive. However, it is worth investing in to make sure you are not crippled by debt in the event you become sick or injured.[28]
Buy automobile insurance. Finally, you should invest in automobile insurance. In fact, it is required of anyone who owns a car in the United States. Auto insurance helps cover the cost to repair your car after an accident and medical bills for you and others involved. A major car accident can put you in debt from car repairs and time off work if you’re injured. It is also possible your assets can be seized to help pay for the other driver’s medical bills if the accident is your fault. Having automobile insurance can help diffuse some of these costs and help keep you out of debt.
Working with a Financial Planner.
Start now. One of the most important things you can do for your personal finances is to start thinking about them and working on them early. It may seem like you have plenty of time to save for retirement, but you can actually lose a lot of money in interest if you wait too long. Make financial planning a regular part of your life—like going to the doctor—and get started as soon as possible.
Get your significant other involved. If you are planning a future together, make sure to include your significant other in your planning. Talking to your partner and including them in the process will ensure you are both on the same page with your spending and saving habits and allow you to develop a plan that meets both of your needs.
Be proactive. Some people assume that everything will work out in the long-run and ignore negative cues about their finances. If you do this, however, you could set yourself up for a major loss. Instead, think about how negative financial situations, like severe drops in the stock market, might affect your financial security and plan alternative options.
Plan out the details. Many people see saving for retirement as a race to reach a certain amount of savings before the date they retire. This approach can be misleading, however. Instead, think about the things you’ll need to pay for, like housing, healthcare, eldercare, hobbies, transportation, and so on. Do your best to figure out how much these products and services will cost you and how you’ll finance them.
Tips.
Figuring out how to handle your personal finances can be very confusing whether you’re a beginner or not. It is a good idea to consult a financial planner to help you decide how to best handle your money.
