Purchasing a car is one of the largest financial decisions that most people make during a lifetime; often, only the purchase of a home is larger. With this in mind, it is apparent that financing the purchase of a car is a very important decision to make. Luckily, the consumer has a variety of financial options.

The first, and cheapest, way to purchase a car is by paying cash. However, most people simply cannot afford to spend that much cash at once. Another popular option is to lease a car; the purchaser makes payments for a certain period of time and essentially “rents” the car for that time period. However, those who want to own the car for its lifetime, but cannot afford to pay cash, often choose to obtain car finance.

Common Contract Terms

When discussing car finance, it is important to understand they key factors which will determine how much you pay for the car and how good of a deal you get. A car finance contract will have very similar terms to other financing and loan contracts: for example,

1. Length of Contract- The overall cost of the car finance contract will depend largely on the length of the payment period. By shortening the payment period, you may be able to save thousands of dollars in interest over the length of the contract period.
2. Interest Rate- One other important factor when determining the overall cost of a car loan is the interest rate. You can save money by finding a lender that offers the loan at a lower rate; even a few fractions of a percentage point will make a difference.
3. Down Payment- A significant down payment can help reduce the overall cost of borrowing. By paying as much money as you can up front, you won’t have to borrow as much, and you will save on the interest charges.
4. Fees and Penalties- Many finance contracts will include different fees and penalties in the “fine print.” Be wary of anything hidden that could substantially increase the cost of the loan, such as hidden processing fees and penalties for prepayment of the loan. 

Tips For Saving Money

While the specifics of the terms of the car loan will depend on how much the financing costs, there are many ways to increase the chances of getting a better deal.  Some of these tips include:

• Initially pay down as much as you can in cash
• Look for alternatives to taking out a loan
• Shop around for the best rates and plans
• Maintain a clean credit record

The Sydney Morning Herald has a great list of personal /car loan tips and questions to consider when taking out a loan. And yes, it’s perfectly relevant for non-Sydney siders too!

Totaling The Costs

The financing of a car is one of the most important aspects of car shopping. Again, one can choose to pay for the car in cash, lease it, or finance the car with a loan. The best way to save money on a car finance loan is to shop around and compare the contract terms from different lenders. However, you can also save money by doing simple things such as paying down a lot of cash and avoiding hidden penalty fees.

For more resources on car financing and car insurance, check out Fido.

Photo by gem66