When it comes to financial decisions, you’ve always prided yourself on being savvy with your money. Now that you’re in the market for a new set of wheels, you want to learn more about your financing options since you’ve heard that buying a car outright isn’t always the best deal for your bottom dollar.

Purchasing a car is a financial investment that doesn’t have to put a strain on your finances. In fact, financing a car can actually help improve your credit score. Make on-time payments and you can help position yourself as a lower credit risk.

Even better, if you choose a financing option wisely, you can make out with a payment schedule and finance charge that fits your budget instead of draining your bank account with a lump sum purchase. Financing can even give you more vehicle options than might be reasonable for an all-cash purchase.

Here’s what you should take into account when choosing a vehicle financing option.

Financing Term

The financing term defines the amount of time you have to pay on your vehicle contract. Most contract terms range from 36 to 72 months (or 3 to 6 years), though some financial institutions now offer 7-year, or 84-month, terms.

The longer the term, the lower your monthly payments will typically be, but the more in finance charges you’ll likely pay in the end.

Look at your budget to determine how much you can afford to commit on a monthly basis. If you have significant financial obligations (think: high credit-card debt, school loan debt, a mortgage, unpaid medical bills, etc.), consider opting for a lower monthly payment. This way, you’ll have some flexibility in case of job loss or other emergency.

Use our Monthly Car Payment Calculator to estimate how much you’ll owe each month.

If you’ve already socked away a considerable amount in savings, think about signing on for a shorter term to help lower the amount of finance charges you’ll pay.

Assuming you make on-time payments, either term option could help boost your credit score.

Type of Financing

Attention car shoppers! You’ll likely have several financing options when you purchase your vehicle.

In most cases, your dealer will present various financing options to you and help you determine your eligibility and compare terms. As with most financial decisions, comparison shopping lets you see what’s available and where to find the best deal.

Ally works with dealerships to offer a variety of financing options with flexible terms. If you’re interested in financing through your dealer and Ally, our Dealer Locator Tool is a great place to start.
Once you select a financing option, inquire about Guaranteed Asset Protection, or a GAP waiver. This type of protection covers the difference between what you owe on the vehicle and what it’s worth in the event of a total loss.  Certain items such as late payment fees may not be covered.  Make sure to understand the terms of the GAP agreement before you purchase.

Down Payment

Just as you make a down payment on a mortgage, you can make a down payment when you finance a vehicle. Consumers buying a used set of wheels might want to consider making a payment that’s 10 percent of the purchase price, while it’s recommended those purchasing a new vehicle put down 20 percent.

As with any kind of debt, you should try to put down as much as you can afford. Your down payment can affect your finance charge. If you make a down payment that’s more than 10 to 20 percent, you could be rewarded with a lower finance charge. And the bigger your down payment is, the less you’re likely to pay in finance charges overall and the lower your monthly payments could be.

Expert Tip: A larger down payment can be difficult for buyers on a tight budget. Before finalizing your down payment, confirm that you still have a healthy emergency fund and can afford to make basic repairs to the car, if needed. You shouldn’t raid your savings for a 50 percent down payment if it means you won’t be able to pay for new tires or brakes when you need them.

Remember, when shopping for a car, you’re in the driver’s seat. Compare, calculate, and negotiate. All the while enjoying the ride.

Use our Dealer Locator Tool to find a dealer nearby and explore your financing options.

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