Car finance: How to choose the best in 2021
Buying a car is what want. But the fact is that paying in cash for a vehicle is not always an option. So in today’s article we are going to talk about a mode of purchase that can help make your dream come true: car financing.
Financing is an alternative that, despite compromising your income for a long period, helps you to have your own car. And as there are many variables that differentiate one financing from another, we will show you what to do to choose the ideal.
First, the most important
- Car finance is one of the ways to buy a vehicle without paying in cash.
- Attention is needed, as there is a wide variation between the financing offered by banks.
- Before signing the contract, you must evaluate all the expenses you will have with the financing and the car.
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Hiring Guide: What You Need to Know About Car Financing
If you have decided that it is time to buy a car, you need to evaluate all forms of payment. One is financing. With this modality you can buy your vehicle for the cash price, but pay the bank little by little.
But the fact is that each bank has different conditions for car financing. And, because of that, it is necessary to research and evaluate well. To help you choose the best car financing, we have created this Contraction Guide.
Car financing: How does it work?
When taking out a car loan, in practice you are borrowing a certain amount of money, for example, from a bank, to pay for the vehicle you want.
But in this case, you have no direct contact with the money, since it is the bank itself that pays the seller of the vehicle. The great advantage is that you can negotiate discounts with the seller since, in practice, the car will be paid in cash.
Then, you start to pay for the debt acquired through monthly installments. The installments include the value of the financing itself, as well as interest, fees and charges.
Therefore, when opting for a car loan, you must take into account your monthly income and, mainly, the fixed expenses you will have with the car to ensure that you will be able to honor it with the payment of the debt.
Is it possible to finance the car without giving the down payment?
The most common in any type of financing is that you pay a certain amount of the cash value, which represents the down payment. The remainder of the amount is then the amount that will be financed.
This is because, in general, the greater the input, the better the financing conditions.
Therefore, getting 100% car financing is not impossible, although it is increasingly rare. This is because in recent years the number of defaulters has increased, which has led banks to adopt stricter criteria for granting car financing.
One of those criteria is precisely the entry. Currently, the most common is that banks provide the car financing with the consideration of an entry of at least 20% of the vehicle’s value.
Still, it is possible to find banks that offer full financing for the car. Therefore, a good payer history and a stable financial situation can help with approval.
In addition, some financial institutions ask as a prerequisite for the total financing of the car that the interested party has one or two vehicles already paid off and an income three times higher than the value of the financing portion.
All of this to ensure that you are committed to paying the debt.
The bigger the entry and the newer the car, the easier it will be to obtain financing, and the lower the interest.
It is worth noting that, if 100% financing of the car is approved, you will pay a higher interest rate and larger installments.
For example, if you buy a car without a down payment and choose to finance it 60 times, at the end of the installments you will have paid almost twice the cash value of the car.
What is the difference between car financing, consortium and leasing?
Car finance is just one way to help you buy your vehicle. And the fact is that it can be done in two ways: Through Direct Consumer Credit (CDC) or through Leasing. But you can also opt for another modality, the car consortium.
At CDC, the bank lends the amount for the purchase of the car you have chosen and sets fees that will be applied to your car financing.
In this type of financing, if you do not pay the debt installments to the bank, justice can be used to seize the vehicle.
In Leasing, there is a form of “loan”. This is because, in this case, the car will be owned by the bank until you have paid all the installments of the financing.
In cases of default, the bank keeps the vehicle and the buyer does not receive the invested amount back.
The car consortium is not financing. In that case, you don’t borrow money. Instead.
You participate in a group in which participants deposit a monthly amount. Every month someone is contemplated and can use the letter of credit to buy the vehicle. That is, you will only have your car when it is drawn.
How to get car financing?
It may seem simple to hire a car loan, but the fact is that it is a process that can be very bureaucratic.
To give you an idea, check below the main requirements necessary to get the financing approval:
- Clean name: If you are restricted by SPC or Serasa you will not be able to get a car loan.
- Age: To finance the car you must be at least 18 and at most 70 years old. Still, car financing approval is rare for anyone under 20. Having a guarantor, however, can help at this time.
- Proof of income: To get a car loan you will need to prove income. If you work with a formal contract, the paycheck serves as proof. If you are self-employed, you can use the bank transaction receipt.
What are the advantages and disadvantages of car financing?
The main advantage of car finance is that, when you have the bank’s approval, you can buy the car right away.
It is often even possible to negotiate a more attractive discount with the seller since, in practice, you will buy the car in cash.
On the other hand, it is necessary to take into account that, today, there are few banks that grant 100% of the financing of a car. Most require you to pay cash. Therefore, it is ideal that you collect the entry fee in advance.
Did you know that, in general, when they approve car financing, banks grant credit whose share commits a maximum of 30% of what you earn?
For example, if you receive R $ 900 per month, you will pay a installment of a maximum of R $ 300. This is a strategy that helps to protect you and the bank against default.
Another advantage is that you pay the debt for financing the bank in long-term installments. On the other hand, this also compromises your income for longer.
However, the downside of car financing is the fact that you will have to bear interest rates and charges that will increase the total amount you will be paying in the end. That is why it is so important to try to offer a larger down payment for the car.
But, for you to get a general idea about the positive and negative points of car financing, check out the table below that we have prepared for you:
How and where to finance a car?
To finance a car you can either look for a bank or try the financing at the dealership itself.
Just contact the institution, through the website or in person. The lender will then ask for documents proving your income and financial condition. Then there will be a review period, in which the financing may or may not be approved.
If approved, you will be able to pay for the financing with a debit account or a bank slip, depending on the creditor institution.
Hiring Criteria: How to analyze car financing
As there are many differences between the types of financing offered by banks, you need to understand what actually varies between one and the other.
For that, we recommend that you first perform a simulation on the banks’ websites. With these data in hand, you should then analyze the following factors:
- Financing rate
- Other taxes
- New or used
- Vehicle age and type
Next, we’ll show you how you can analyze each of these criteria that will appear in your car finance simulation and then choose the one that offers the best conditions for you.
The first factor that you should pay attention to when performing the simulation to choose car financing is, in fact, the interest rate charged.
You find out the total interest applied through the difference between the final amount of the loan and the price of the vehicle. With this data, you will be able to know beforehand, before signing the contract, how much you will pay in addition to the total price of the vehicle.
To try to reduce interest, it is important to consider that this rate varies according to the value of the car, the entry, the year of manufacture, the number of installments and, consequently, the term of the financing.
As we saw in this article, the newer the vehicle is and the greater the down payment you pay, the lower the interest you will need to pay the bank to obtain the financing.
When you commit to car financing it is important to also consider the other fees that you will need to pay.
Here we do not deal with fees that will be paid with the installments to the bank, but those that refer to the use and maintenance of the vehicle. After all, it is useless to commit to a car loan if you cannot pay for all costs.
Therefore, when choosing the best financing rate and the best value of the installments, take into account the expenses you will have with insurance, maintenance, licensing, IPVA and taxes on your car.
New or used
Also note that, although most banks provide financing for new and used cars, this is not always a rule.
The vast majority of used car financing is made only by banks.
The fact is that the vast majority of used car financing is made only by banks. That’s because car dealerships usually make a line of credit available only for new cars.
Also, take into account that in the case of used cars it is important to pay attention to the conditions of the engine, tires and paint, in addition to checking the documentation as there may be some fine pending, for example.
And all of this can interfere with the approval of your financing by the lender.
Vehicle age and type
Another factor that you must consider is that each bank has different rules regarding the type of vehicle and the maximum age of the year of manufacture for which the financing is granted.
Some banks, for example, offer financing for cars up to 8 years old. Others already allow you to use financing to buy cars up to 10 years old.
In addition, it is important to make sure that the lender you choose provides financing for the brand of car you want.
As we have seen, the longer the term of your financing, the greater the commitment of your budget.
But, in addition, you need to be aware because the main problem with very long terms is that you, in general, end up paying much more than the value of the car.
To give you an idea, if the value of the car you want to buy is R $ 50 thousand and you choose to pay the financing in 60 monthly installments, that means that you would pay a portion of R $ 834.
But it is necessary to add to this installment the interest rate practiced. If it is, for example, 1% of the vehicle’s value, the installment that you would have to pay to the bank would then be R $ 1,334.
With that, at the end of the 60 months of financing, you will have paid R $ 80,040 to the bank, R $ 30 thousand more than the cash value of the car.
Car financing is a good alternative for those who cannot pay for the vehicle in cash. With financing, you acquire the car and have a long term to pay the debt to the bank in monthly installments.
However, it is necessary to prove fixed income to obtain approval of a loan. In addition, it is important to take into account that it is a debt that can be very high if you do not search for the best interest rates.