Is Financing a Car Right For You? Here's What You Need to Know

Aug 09, 2021 09:35 AM EDT | Ernest Hamilton

Is Financing a Car Right For You? Here's What You Need to Know

(Photo : Is Financing a Car Right For You? Here's What You Need to Know)

Financing has become an increasingly popular means of purchasing a new car, so much so that many customers look past the list price completely. Indeed, this is one reason why retail prices of cars have risen so steeply over the past decade, without much pushback from customers. Ultimately, many choose the financing root instead. 

Although it is a trend, financing is not without its limitations, and can actually prove more costly than buying the car up front. 

Nevertheless, many prospective buyers regard financing packages as a tempting means of owning cars they would otherwise find impossible to afford, falsely believing that financing is better for their bank accounts than buying outright.

Here's what you need to know about car financing, and whether it is right for you:

You will need GAP insurance

If you want to finance a car, it is not as simple as walking up to a dealership with a financing package in your pocket and them handing over the keys. There are a few little-known details that need to be addressed first. 

One of the most important is car insurance. If you want to finance a car, you will need GAP insurance. This is a type of insurance unique to auto financing, as it relates to the difference between the car's retail value and its value once you have paid off the finance package.

Most new cars depreciate heavily in the first year or two, which is exactly the window in which you are paying off your loan. You may find that the car is not worth the same as it was when you signed up for the finance package, meaning you are effectively paying over the odds for the car after a year or two. 

This is the void that GAP insurance seeks to fill. Of course, you may think you'll be eligible for a gap insurance refund after your finance deal is settled, which is an important point to consider. 

Financing a car does not make it cheaper in the long run

Another point that is worth remembering about car financing is that you will likely end up spending more money than if you paid for the car outright. Many people wrongly believe that because the individual payments are smaller, the sum total will be less impactful on your bank account. 

While it is true that you will save money in the short term and allow you to get your hands on a car that you wouldn't otherwise have the cash to purchase in one payment, don't be under any illusions that financing is a cheap way into premium automobiles.

You will need to be able to pay the same amount every month

A key issue with financing is if you are caught short one month and don't have the necessary funds to pay your financing direct debit. This is a dangerous position to be in, because your payments will mount up and you'll likely be charged interest. 

As a result, it is unwise to enter into a finance deal if it stretches your bank account to the maximum. Instead, negotiate a better deal, in which you pay smaller amounts over a longer period of time. This way, you will avoid the danger of insufficient funds.

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