The Basics of Motor Vehicle Finance

  Not everyone has sufficient cash to pay for their car in at one go. In fact, the majority of car buyers rely on motor vehicle financing to pay for their vehicles. If you have never applied for motor vehicle financing before, the process can seem complicated.

But it isn’t, you only have to be careful to and understand what each term means. This is because a lot of the terms that are used can be confusing at first. You may end up signing up for one thing, when in reality you meant to sign up for something else.

It’s not so complex though; take your time to understand the steps and what’s involved in each step, this is how the process becomes clear.

Choosing the Right Motor Vehicle Financing

Motor vehicle financing is available as either dealership financing or direct lending. Let’s look at what each entail.

Dealership financing

This type of financing is offered through the a vehicle dealership. You sign a contract, agreeing to pay the financed amount plus interest within a specified period. The dealership then sells the contract to a financial institute to whom you now pay the financed amount.

Direct Lending

Direct lending involves getting a loan directly from a financial institution to buy the vehicle. You agree to pay back the loan plus interest within a specified duration.

Advantages of direct lending

Accessing a direct loan to finance your vehicle purchase allows you to know your loan rates, finance charge, and other applicable terms before buying the vehicle. You won’t walk into blind spots that you were not aware of, as far as loan terms go.

Approaching a lender for financing before buying the vehicle also allows you to compare the loan rates and terms of different lenders for the same vehicle.

Advantages of dealership financing

Accessing financing through the dealership exposes you to a variety of financing options. The dealership may let you pick the company which provides the financing.

Since the entire purchase process is carried out at the dealership, this option tends to be more convenient for busy people. Simply show up, choose your vehicle, and sign the paperwork to initiate the financing. You don’t have to work with a lender first and then come and deal with the vehicle dealer.

Dealership financing also exposes you to discounts and incentive programs the manufacturer may be offering, cash backs on certain car models or lower prices.

Motor vehicle finance terms

The lender won’t give you the entire amount required to buy the vehicle. You must deposit a down payment, which then reduces the amount of finance you require. The down payment varies from vehicle to vehicle. It may also be influenced by things like the value of the vehicle.

In dealership financing, the financial institution still provides the financing, but in this case, they do so through the dealer. The dealer sells them the contract in exchange for the finance amount agreed and collects the monthly payments from you.

The terms of motor vehicle financing vary from one lender to another depending on a number of factors, among them being:

–    Your credit scores

–    The finance charges

–    The annual percentage rate (APR) charged. APR is determined by many things, including market conditions, competition, your credit score, current finance rates and dealer’s compensation.

The rate is determined at the time of the vehicle purchase. Most dealers are willing to lower the APR if you negotiate, so don’t shy away from making yourself heard.

–    The total amount you pay for financing depends on the price of the vehicle, the APR and the loan period.

How to get the best vehicle finance deal

Most finance deals are negotiable. It’s the same with vehicle financing. When you visit the lender or dealer for financing, remember they are making money off you. It’s in your best interest to negotiate a deal that will be fair to you.

Unless you do this, you may end up paying far more than the vehicle is worth.

So, how do you do this?

– Negotiate the price of the vehicle with the dealer. Even though you’re not paying him in full, the dealer is still getting good returns by selling you the vehicle. The lower you can go, the more savings you get.

– Choose a short to medium term financing option. You don’t want to still be paying for the car eight or nine years down the line. Long-term vehicle financing tends to be more expensive in the end because the rates may be higher.

Do not be blinded by the lower monthly payments that a longer-term plan gives provides. Whenever you’re unsure, remember the value of the car will have depreciated a lot by the end of this period, this will help you see where the value lies.

– Try and correct your credit score before applying for the financing. A good credit score may earn you better rates.

– Make sure you understand what the contract says before signing. Only sign when the deal has been approved.

How different is Vehicle Financing different from Leasing Financing?

Vehicle leasing financing is given where the car buyer is only leasing the vehicle for a specified period and not buying it. Leasing is great for individuals who don’t drive a lot but may not be practical for people who use their cars a lot.

Under a lease, the dealer gives you a car, for which you pay a certain amount every month. This amount is generally lower than what someone buying the car would pay.

At the end of the agreed lease period, you return the car back to the dealer, pay an end-of-lease charge if applicable and you’re released from monetary and servicing obligations related to the car. In some lease agreements, you may be given the option to buy the car at the end of the lease period.

A major disadvantage of leasing is that it does not give you much flexibility in using the car. For example, you should not exceed the indicated mileage, despite the fact that you’re paying for the car.

But again, depending on your car’s needs requirements, leasing may be better than buying.

In conclusion, determine what’s your car’s usage and  requirements are before choosing a vehicle finance option. This will help you understand which option is best suited for your necessities.