The Basics of Car Financing- How it Works

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car financingYou have done your research, and you have found your dream car. Now it’s time to pay for it. In most cases, paying for the car is the last step, but in the real sense, it should be the first. Finding just the right car can a big challenge, but deciding how to pay it can be a tougher challenge. In this guide, we summarize the payment options available to help car buyer’s weight up on the next step in making payments to vehicles of their choice.

Deciding which payment method to use is an important decision and it is critical to take time and think through the following financing options;

1.    Cash

cash is always the most cost effective way to buy a car if you have enough savings.

2.    Personal loan

You might be able to get a personal loan from a bank, or a savings society with repayment spread over a couple of years. However, the monthly repayment can be higher as compared to the other options. Personal loans are in most cases the cheapest way to borrow over an extended period. However, if your credit rating isn’t good, it might be difficult to get one. If it’s hard to get a personal loan, you may consider seeking other financial methods offered by car dealers.

3.    Car leasing

When it comes to car leasing, it is more of a long term-term rental as you make fixed monthly payments that allow you to use the vehicle until the contract expires. With car leading, there are two main types – the Personal contract hire and the Personal contract purchase.  Compared to the other types of car finance, the payments tend to be lower, but there is a mileage restriction.

4.    Hire Purchase

hire purchaseHire purchase happens after paying a deposit of typically around 10 % -20 %, and then you commit to a fixed monthly payments over an agreed time span. Unlike a personal loan, while using hire purchase, the car is not yours until the final payment is made.

Before making a car purchase decision, there are a couple of things you need to remember. In case you are planning on taking out a persona loan or car finance arrangement, ensure that you understand a few components;

– With leasing, you a charged a certain fee if you repay early or even exceed the forecast mileage.

– It is important you compare the total cost of borrowing, inclusive of the interest rates and all other charges over the term of the loan

Before financing or leasing your car, take a look at your financial situation and determine how much you can afford. You need to have substantial expenses to cover your monthly expenses. When making a decision to purchase a car, understand that the total amount you shall pay depends on various such as the age of the car, type, mileage, number of owners, etc.

If you enter a car purchasing plan, it is better you come up with a plan that shows your current expenses, as well as a revised one, that shows how your spending shall be, to avoid instances of running out of cash.


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