Due to its cost, one of the favorite methods for acquiring a vehicle is to finance it; this process has several advantages and disadvantages that we must analyze before deciding on the type of financing and some other issues that we will discuss later.
Furthermore, it's important to mention that in recent years, various programs have been implemented to incentivize vehicle purchases , or rather, to remove older cars from the market and replace them with newer, more efficient models. One example of such a plan is the PIVE (Incentive Plan for Efficient Vehicles), which offers a subsidy of €2 to purchase a new car to replace one that is more than 12 years old.
Given all the economic and political circumstances, we must do a thorough analysis to determine the viability of financing a car, and to be able to do it in a better way, and much more agile, we have written this article with a series of tips that we can follow so that When financing our car we make good decisions and it is a pleasant experience, avoiding the risk of future complications.
We have to be realists
When listening to the various offers from salespeople, it's normal to get excited about one of the newest and best-equipped cars or trucks; however, letting emotions guide you rarely leads to good results. Therefore, it's highly recommended that you be realistic about the fact that your budget is limited.
So to avoid illusions when going to see the cars it is advisable that we have prepared a budget beforehand in which our limits are mentioned both for down payment and for the monthly payments and the deadlines to be met. this way it will be much easier to make the right decision regarding the best car for our needs and our budget.
A tip to make this budget is to take into account the monthly expenses, include in the calculations that part of our income goes to a reserve to later analyze how much of the remaining income we are willing to use to be able to liquidate the new car. If we put this advice into practice, we will undoubtedly avoid many disappointments and also many problems.
Analyze the various financing options
In the market we can find many options to finance our new car, broadly speaking we can mention only two institutions that have the option of financing a vehicle.
The first option we'll mention is the dealership itself. This is generally one of the most time-consuming methods, as the dealership needs to investigate the buyer's profile before the loan can be approved. However, it's true that the process can be simplified because you don't need to visit both institutions to complete the paperwork; you can obtain approval simply by going to the dealership. Another advantage of this type of financing is its flexibility, which makes negotiating the paperwork easier.
On the other hand, we find banks, which are the financial institutions par excellence. Carrying out the procedure is much easier, especially if we have a bank account in that institution. If so, we must investigate the various options that the bank will make available to us.
Be prepared for financing offers
Once we know what financing options exist, it is important that we are ready to be able to negotiate the conditions and also to be able to analyze and make a financially correct decision. Specifically, we refer to being prepared knowing the interest rates that exist for financing.
Broadly speaking, we can mention three types. The first is the multi-payment plan. This type of financing is offered by car manufacturers and could be considered a type of vehicle lease, as a monthly payment is made. After the period agreed upon by the manufacturer and the user, it's possible to pay off the car by paying an amount that will be determined according to the vehicle's value and the size of the monthly payments. However, there is also the option for the manufacturer to exchange the vehicle for a newer one, provided that the agreed-upon monthly payments continue.
Other types of interest rates or loans include fixed interest , which means the buyer will always pay the same amount. Variable interest, on the other hand, means the monthly payment can vary considerably, so you can either gain or lose money. Finally, there's flexible interest, which uses a method that allows the dealership to waive the first installment and reduce the monthly payment, but only during the first year.
Learn how to use an amortization chart
To make better decisions and gain a more accurate overview of your financing, it's important to use financing simulators, which can be specifically designed for car loans or general loan simulators. These simulators will provide a near-exact estimate of the monthly payments you'll need to make to pay off your debt.
These simulators typically allow us to track the amortization process over the entire loan term. This helps us visualize the principal payments versus the interest payments. Based on this information, we can even plan to make additional principal payments to reduce interest and pay off the debt more quickly.
This brings us to another piece of advice: once we take out a loan, there are two amounts of money we'll have to pay. On the one hand, there's the principal, which is the net amount the institution financed us. So, if we finance €10,000, that's our principal amount. On the other hand, we have the interest, which, continuing with the previous example, if it's 10%, would be €1,000. However, paying directly towards the principal will allow us to reduce the interest we pay.
But before taking this action, it is important that we are well informed about the loan clauses regarding this matter, because while some institutions charge a fine for contributing capital, there are others that need to clarify that the payment goes directly to Capital, in case of not clarifying it, it may only be included as part of the payment for the following month, which would not change the amount of interest we would pay.
Consider other expenses
We previously mentioned the importance of budgeting to determine how much money we can allocate to paying off our debt. Now, we'll add another factor: a car requires maintenance, cleaning, fuel, and other expenses. Therefore, when creating your budget, it's advisable to factor these costs into your budget so you can cover them when needed and keep your car in optimal condition.
Be prepared for the paperwork
Up to this point we already advise investigating the types of institutions and the types of financing or interests that we can access; And once a decision has been made about which is the best option given our circumstances, it is important that we now have all the information about the requirements to be able to access this or that financing.
Having a list of the required documents and the steps to follow throughout the entire process is crucial to ensure that the procedures don't stall due to missing documents or similar issues. Therefore, before officially beginning the process, we should review this list to be prepared for a smooth procedure.
Read the entire financing agreement
Although, up to now, we may have already investigated a large amount of information, it is important that, when carrying out the formalities officially, the content of the contracts or documents that are signed is read very carefully. And if any doubt arises, it is advisable to question the person in charge of the process; in this way we can ensure that we fully understand the terms to which we are submitting. In addition to that we will have an even more specific and detailed panorama on what we must comply with.
Before we finish, we will give a piece of advice that was discussed a little at the time of starting this article, and that is that, although there are a series of economic support from the state, it is important that we investigate what opportunities exist, and in case our situation is the indicated one, it will be possible to access said governmental support that will help us to acquire a new car.