So, vehicle financing is not just a super fun topic of discussion, it’s also super important. Many people choose to finance when they buy a car. Let’s talk about what exactly it is so you can decide if it’s something that’s right for you.
How vehicle financing works is the bank loans you a certain amount of money. You agree to pay that money back over a set amount of time (the set amount of time is a maximum, meaning you can pay off the loan before this set time reaches its full life).
Sounds great, right? Well, there’s a catch. Every month you’ve gotta pay a certain amount of interest, which is a set percentage of the loan.
The chart above shows what you could be paying in interest for a loan. This means that all the money you’re paying is not going toward paying off the actual loan, but to paying the bank. For example, on a 60-month $5,000 loan with 10% interest, you would pay $1,374.11 extra to the bank.
For this reason, it’s better to save up and pay cash for a car. Doing this lets you avoid paying those interest fees and pay less overall. Financing a car can help you build up your credit, but will also cost you more in the long run. Choose wisely.