Deciding on whether to pay cash or to finance your car? Financing can help boost your credit score and get you into a more reliable car.
Deciding whether to pay cash or finance your car can seem like a confusing process. When purchasing a vehicle, it is crucial to understand the car shopping process and your available options to make an informed purchase. For most people, buying your first car is the first significant purchase you will make.
Financing will allow you to drive a newer and more reliable vehicle while also helping to build your credit. In this article, we provide a guide to financing your first car. Let VINN help you in your car shopping journey:
If you are a first-time car buyer, you may be considering using cash for your vehicle purchase. Paying cash can offer some advantages, such as having no monthly car payments and interest payments. However, buying a car in cash will take a large amount of money, and like most people, you may not have thousands at your disposal.
Also, if you tie up all or most of your available funds in your car, you will not have money left over to save or invest elsewhere. Even though cash can offer some benefits, it is not always the best financial decision, especially when borrowing rates are low.
Paying cash can also limit your budget, and therefore your vehicle selection. Most car buyers will have a cash budget of $10-15K. And finding a reliable vehicle in excellent condition can sometimes be hard to find with this type of cash budget.
In comparison, financing a car will give you flexibility with your budget, vehicle selection and help build your credit. Overall, financing can offer significant advantages that will help you learn financial literacy.
Considering leasing a vehicle? Check out VINN’s guide to Financing vs. Leasing.
Financing is when you make monthly payments towards eventually owning your vehicle. Your monthly payments will include your principal and interest amount. As you continue to make the monthly payments, you build up equity, and at the end of your loan, you own the vehicle. Your monthly payment will depend on the price of the vehicle, the terms of your loan, and your down payment.
When you finance a car, you have two options for car loans: direct lending and dealership financing.
For direct lending, your borrow money from your bank or credit union. You then use your loan amount to pay for your vehicle. After you enter a financing agreement with the dealer, you will pay monthly payments towards your loan for a defined period of time.
Direct lending can offer more flexibility and result in lower interest rates and more favourable terms, depending on your relationship with your bank and your credit rating. You will also know the terms of your loan before beginning the car shopping process, which can help you make an informed purchase decision.
VINN Tip: Direct lending can help you establish a relationship with your bank. Keeping up with your monthly payments will build your credit and your financial future with your bank.
For dealership financing, you receive financing for your vehicle through the dealership. In this scenario, you enter a contract with the dealership to purchase a car. You will then pay fixed monthly payments for a specified period.
Most dealerships have relationships with multiple banks, so they can sometimes offer a range of different financing options. Dealership can also provide financing promotions such as shorter contract lengths or larger down payments.
VINN Tip: If you are purchasing a new vehicle, dealerships can sometimes offer subvented rates. Subvented rates or loans are when the manufacturer provides reduced interest rates for financing. You will often see dealership promotions for 0- 1% interest rates. To qualify for subverted rates, you need to have a solid credit rating.
Dealership financing can be a convenient option. One thing to keep in mind is that dealerships will often sell your contract to a bank, which can cause your payments and interest rates to be higher. Whereas, with direct lending, you are going straight to your bank and cutting out the middleman, possibly leading to more favourable payments and interest rates.
VINN Tip: If you decide to go with dealership financing, there is no need to shop for financing at multiple dealers. VINN will find the best vehicle for your lifestyle and budget, and a VINN dealer partner will get you the best approval based on your credit.
VINN Tip: If you are looking for a relatively new car, look for CPO (Certified Pre-Owned). In many cases, you'll be able to acquire a subvented rate!
A range of factors calculate your credit score: how long you’ve had credit, carried balances on credit cards, if you regularly miss payments, amount of outstanding debts, being above or close to your credit limit, and records or indications of insolvency or bankruptcy.
VINN Tip: If you are still building your credit, having a well-established co-signer like a parent or grandparent can help you attain better interest rates.
Financing a car can act as an effective strategy to build or strengthen your credit score. When you make the scheduled payments towards your auto loan, it improves your payment history, thus boosting your credit score. However, failure to keep up with your scheduled payments can negatively affect your credit score.
VINN Tip: Starting to build your credit at a young age will act as a stepping stone towards future financial milestones, such as taking out a mortgage.
When shopping for a new car, you have three options: cash, lease, or finance. All three options offer different advantages that will depend on personal preference and financial situations.
In this article, we explored the financing scenario. To recap, here are the main advantages of financing your next car:
Continue your car shopping research and find out how much you should spend on a car and what you should consider when buying a car.
Considering leasing a new car? VINN has your back. Car shopping made simple.
At VINN, we work directly with you to guide you through the process of finding a new car. Our vehicle experts will work with you to ensure that you get the best value for the right car, and you can also browse our inventory. Complete the VINN vehicle questionnaire to connect with one of our vehicle experts.
Happy driving!
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Describe your needs and budget to a VINN Vehicle Expert. They'll find cars that match your preferences and send you the results. Want to book a test drive? They'll arrange that too. No charge.
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