How to Finance a New Car

How to Finance a New Car

Are you wondering how to finance a new car but do not know what the options are for your vehicle needs? Few consumers can afford to simply pay cash for the total cost of a new vehicle. Instead, an auto loan is the best route to take. A car loan will cover most of the costs associated with buying a car. 

Finding the right lender is the first step to securing your new wheels. Traditional lenders offer favourable terms but require a credit score of 600 or more. While you can negotiate with dealerships, you could end up with a higher interest rate over a shorter term. Don’t forget the down payment of between 10% and 20%.

The different types of loans offered these days require caution and an understanding of what they entail. Seeking out the most desirable car is extremely important. When you know how to finance a new car, you won’t have trouble locating an option that suits your budget. 

Most first-time vehicle buyers turn to their local dealership or a bank first for a loan. However, there are many other options out there that might be more suitable. Here you will find the guidance you need to navigate the process and determine the most cost-effective means to finance your dream car.

How to finance a new car through a dealership or financial institution

When seeking vehicle finance, you have two primary options at your disposal. They are the banks and credit unions, otherwise known as traditional lenders, and car dealerships themselves. The former is referred to as direct lending, while the latter is known as dealer financing.

What you should bear in mind

When looking into how to finance a new car with a loan, you will find that lenders have certain requirements. One of the primary qualifying requirements will be a prescribed minimum credit score

Your credit history is kept on record and is used to calculate your overall credit score. Any purchase you’ve made with a credit card or on account will be recorded. This record, which includes any loans you’ve taken in the past, will influence your credit score. 

Your credit score represents your creditworthiness and, in Canada, typically ranges from 300 to 900 points. If you are deemed to have a credit score of 300 or less, it is considered very poor. While 900, on the other hand, would be seen as excellent. A score of 600 and above is regarded as a good score, which lenders prefer.

Therefore, knowing your credit score is vital to understanding how to finance a new car. Suppose you’ve managed your finances well and obtained a credit score above 600. In that case, it will be easier for you to receive financing.

Then there’s the down payment to bear in mind. This is a lump sum amount you’ll have to pay upon signing your loan agreement and is not included as part of the loan.

In most cases, lenders require 10% to 20% of the car’s value as a down payment, but some may accept less. However, it would be to your advantage to put as much as you can into the down payment. That way, you will need to borrow less, which means lower repayments. A minimum of 20% is recommended.

If you want to take out a loan with no money down, you will likely need a co-signer.

Dealer financing

When looking into how to finance a new car, a dealership may come to mind first. There is some information worth noting about this type of financing to help you get the best deal for your budget.

Dealer financing is a type of funding where the dealership serves as an intermediary between a vehicle buyer and a lender.

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This is one of the most convenient ways to purchase a new car. However, dealerships usually include additional fees, which could amount to 10% to 20% of the purchase price. It should be noted that these dealership fees are not included in the usual finance charges.

These additional fees can be added to the total amount financed, or you can pay them upfront. Remember that adding them to the loan will increase repayments and the time it takes to pay off the principle of the car loan.

Traditional lenders will run a credit check to determine your overall creditworthiness before offering you a loan. Therefore, to obtain a loan from a conventional lender such as a bank, you will need a good credit score. 

Perhaps you would like to find out how to finance a new car when you have a low or bad credit score? In this case, there are still options available to you, and approaching a dealership or alternative lender may be your best bet.

Doing thorough research and negotiating can save you hundreds of dollars when looking at dealer financing. In addition, by keeping your credit score at a respectable level, you will have more purchasing power.

If you are still having trouble finding the best terms for your needs after doing your research, consider a direct lender.

Direct lending

If you have a good credit score (600 and above), direct lending may be the best financing solution for you.

You apply to finance for a specific amount when borrowing from a traditional lender such as a bank or credit union. Once approved, you’ll have to agree to the lender’s terms, including a specified repayment period and interest rate.

You can visit your local banks and talk to sales representatives about a loan for your vehicle buying needs. Most banks provide services through their websites that make it simple to apply and qualify for a new vehicle loan. 

In many cases, loans through traditional lenders come with no or low-interest rates. This will be beneficial in the long-term, as you will end up paying less for the vehicle than you would have through a dealership.

Traditional lenders will communicate directly with the person taking out the loan. No third-party service providers participate in the process. Without an intermediary, there are fewer fingers in the pie. For this reason, your rates and fees are less when borrowing from a bank. This upside is worth bearing in mind when trying to understand how to finance a new car.

Once you have your loan, you can shop around for a car at a dealership and use the loaned funds to pay for the purchase. In this way, you are preapproved for a loan, and there is less chance of a car dealer sticking you with a bad deal.

Direct lending vs. dealer financing: which is better?

Whether you obtain your car loan through direct lending or dealer financing is entirely up to you. It all boils down to personal preference, the type of car you are buying, your budget, and whether you qualify for a loan.

When considering how to finance a new car, it is always a good idea to shop around and compare your options, no matter which type of financing you decide to use. 

Remember, it never hurts to ask for a quote from several different lenders before deciding on the one that is the best fit for your budget.

How to finance a new car through alternative car financing options

Can’t get new car financing through a dealer? Here are some alternative ways to finance your new car:

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Credit cards

A credit card is a popular method of financing purchases large and small.

While investigating how to finance a new car with a credit card, bear in mind that this method has a few issues.

Firstly, it will not give you the freedom of being able to choose your own lender. It limits your options to one: your credit card issuer.

Secondly, you’ll have a limited amount on your credit card to work with, which might not be enough. Even if you can raise your limit, it may not be a good idea. 

Any payments made with your credit card toward that perfect set of wheels will also incur interest. And this interest rate will probably be more than the interest a traditional lender will charge you.

If you cannot pay the amount owing each month, then the interest will continue to accumulate. This can quickly grow into a sizeable amount of debt that can be difficult to repay.

It may seem like an attractive option when investigating how to finance a new car by credit card. Read the fine print on your credit card agreement and make sure you know what you’re in for before making any rash purchases.

You could perhaps consider using your credit card to make the down payment on your new car. Or you could think about paying a portion of the purchase price with it instead of the total amount.

 Online lenders 

Another option while detailing how to finance a new car, apart from those we have explored, is visiting an online auto loan website.

These websites offer consumers the ability to compare many auto loans in just a few clicks. By comparing loans side by side, you can quickly and easily determine which deal offers the best value for you.

What’s more, you can go online whenever you want, day or night. You can do everything, from searching to filling out applications and even negotiating the price, online. 

Online lenders have made the process so easy that you can make the entire loan application from the comfort of your sofa. Therefore, it’s easy to see why using an online platform has become a popular option for borrowers.

Of course, you will still need to visit a dealership before you can drive away in your new car. However, the process of applying, being accepted, and getting financing can be much more accessible online.

Personal loans

Obtaining a personal loan is one final consideration when thinking about how to finance a new car.

When you apply for a personal loan, you choose the lender you would like to work with, much like any other loan. In addition, you have the power to negotiate your loan terms and conditions with your lender, including the interest rate.

There’s one key differentiator between a car loan and a personal loan: the collateral associated with it. In the case of auto finance, the vehicle you plan to purchase stands as collateral against the loan.

The primary difference between a personal loan and a car loan is the collateral attached to it. With a car loan, the vehicle you intend to purchase serves as collateral, reducing the risk to the lender and lowering your interest rate.

When it comes to a personal loan, you can choose to use an alternative asset as collateral. You also have the option of obtaining an unsecured loan if you opt for this method of financing. 

Alternative Car Financing Options

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Can't get new car financing through a dealer? Here are some alternative ways to finance your new car. 15 minutes

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1. Credit Cards

A credit card is a popular method of financing purchases large and small.

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2. Online Lenders

An online lender offers consumers the ability to compare many auto loans in just a few clicks.

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3. Personal Loans

Personal loans give you the power to negotiate your loan terms and conditions with your lender.

Final thoughts on how to finance a new car

There are several options to fund the purchase of a new vehicle. Looking into how to finance a new car with an auto loan gives car buyers two main options: dealer financing or direct lending. 

Although they both come with their advantages and disadvantages, it is wise to consider what works for your budget and vehicle needs.

There are alternatives such as using a credit card, online lending, or obtaining a personal loan, which could also work for you. Either way, make sure you consider all the options detailed in this guide to determine the best possible financing for you.

At Comparewise, we can help you find the best deal by comparing 50+ dealers in your area. Find out what you qualify for by simply fill out our online car application.

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FAQs about Finance a New Car

What is car financing?

Car financing is when a customer enters a contract to purchase a car and agree to pay the amount over a period of time. Car financing involves you to pay for interest in return for the loan.

Do car financing cost anything?

Yes. By financing a car, you will have to pay any interests and fees that a car finance company may charge. The cost of a car loan will depend on how much you can borrow, the loan term, interest rate and other fees associated with it.

How can I save on car financing?

Our tips on this page include:

  • Double-check your credit score
  • Make sure you have a decent down payment
  • Avoid skipping any payment
  • Pay any fees when you can upfront
  • Explore different options
  • Choose a cheaper car
How can I get finance for a new car?

You can finance a new car through credit cards, online lenders, personal loans and car loans. Financing a car with a credit card is optional but you will only have a limited amount. Online lenders are easy as they provide you with a loan application online. Personal loans and car loans are the most popular options as you can control your loan terms and conditions with the lender you choose.

Where can I find the best finance for a new car?

There are a lot of options out there that can easily be found online. If you wanted a more specific option, Comparewise can help you find the best deal by comparing 50+ dealers in your area.

July 25, 2021
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