Car Finance Explained

In this article, I wrote a bit about car finance. I know this has been discussed by experts before but, honestly, I don’t think it’s been covered in the way I wanted. I think that finance is an important topic. It’s how most people buy their cars but, honestly, not a lot of people buy their cars sensibly through finance.

The number one reason for people using car finance now is because they want to essentially get a car that they don’t have the full amount of money to pay for. So, what they want to do is to put a small amount of money down and then they want to pay a certain amount every month.

There are different types of car finance. It can apply to different people in different ways based on how much you earn. The biggest problem is that now you walk into a showroom and the first question they ask you when you’re looking at a car is how much can you spend a month. That’s not actually the right way to be looking at spending money on a car because finance deals can be tailored to meet your monthly requirements when you don’t realize you’re actually paying a lot more for the car than the dealer tells you.

There’s been a lot of changes in the law and how they can, kind of, sell you car finance like this. So, totally understand that everything that the dealer offers you now you get the full information by extra research. But, what people just still don’t understand is that when they take out that car finance a lot of what it is that they’ve loaned or what they’ve borrowed gets offset towards the end and you pay a lot of interest on that money.

There’s something called a standard hire purchase agreement. A hire purchase agreement is when you put a deposit down, say five thousand dollars and the car is fifty thousand and all you do is pay the equivalent of the 45 thousand, borrowing, divided by the period of time that you’ve got that car. There’s an interest rate that’s charged for a higher purchase and that high purchase rate in like the US could be something like a three percent flat rate. Additionally, there is something called APR. APR and flat rate are two separate things basically. APR is usually about double what the flat rate is and what you should be really looking at is the flat rate because that flat rate is the same amount of money that you would get if you put your money in the bank. People finance cars for different reasons, as I mentioned, and, obviously, the number one reason is so they can afford a car that essentially they can’t pay for in full. But, what’s important to notice is that car finance can also be a sensible way of using your money. First things being,  for example, is that if you’re buying a three hundred thousand dollars worth car and you do finance it for a rate of say three percent on a flat rate, which is a very good rate it, in fact, this means that you can use most of that money elsewhere. You can put fifty thousand into a car payment and you borrow two hundred fifty thousand dollars. If you put that 250,000 elsewhere and you make a higher return on it so your money is making, let’s say four percent in a year, there’s no point you have your money sitting in a car. That where you can make an extra percent. 

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