Purchasing a new car can make you feel like you’re on cloud nine, but paying for said car isn’t always as ethereal an experience. When purchasing a new vehicle, make sure you get a payment plan that’s right for you. If you end up with a repayment plan that doesn’t suit your budget, you may end up making late payments or missing payments. In order to find the right plan, you need to understand the tools that are used to calculate a plan, interest rates and how they apply, and loan lengths. If you’re able to budget your finances and predict what kind of plan will work well for you even before you set foot on the car lot, you’ll be in good shape.
Repayment Plan and Loan Options
Most people can’t pay out of pocket for a new or even used vehicle. To deal with this problem, a person will borrow money from somewhere—often a bank—and repay it over time. There are several different types of loans.
- Loan from a Bank
Borrowing money from a bank is a simple way to pay for your car. The bank pays for your vehicle, and then you pay the bank back over a specified amount of time. The bank will also charge interest over the length of the loan, so you usually want to look for a shorter rather than longer loan repayment period. You can get these loans from a bank or let the dealership help you shop their stable of lenders for the best rate.
- Hire Purchase
This type of borrowing is done through the car dealer. You pay the dealer every month for a specified amount of time. The dealer allows you to drive the car while making payments, and once you make the last payment you actually own the vehicle. This method is commonly called “Buy Here, Pay Here” and will not help to build your credit.
- Personal Contract Plan
With this type of plan, an agreement is made for you to pay the difference between the vehicle’s sale price and its resale price. The payments are then spread out over the course of several months. At the end of the term, you can pay the resale price and own the car, or give the car back to the dealer paying nothing. This is commonly called a lease.
Loan Lengths and Interest Rates
No matter what type of repayment plan you decide to go with, there are some things you need to keep in mind about loan lengths and interest rates. For interest rates, make sure it is simple interest and not compound interest. Simple interest accrues on the principal amount of the loan, and compound interest accrues on the principal and the accumulated interest. As far as the length of your loan goes, you need to think about how long you’re going to have the car, and how soon you can pay it off. You don’t want to exhaust all of your funds paying the car off as quickly as possible, but you also don’t want to spend ten years paying it off. Try to find a happy medium, one where you can pay off the car in a few years and still be able to enjoy life in the process.