You have two choices: pay in full or finance over time. If you finance, the total cost of the car increases. That's because you're also paying for the cost of credit, which includes interest and other loan costs. You'll also have to consider how much you can put down, your monthly payment, the length of the loan and the annual percentage rate (APR). Keep in mind that APRs are usually higher, and loan periods are generally shorter on used cars than on new ones.
Dealers and lenders offer a variety of loan terms and payment schedules. Shop around, compare offers and negotiate the best deal you can. Be cautious about advertisements offering financing to first-time buyers or people with bad credit. These offers often require a big down payment and a high APR. If you agree to financing that carries a high APR, you may be taking a big risk. If you decide to sell the car before the loan expires, the amount you receive from the sale may be far less than the amount you need to pay off the loan. If the car is repossessed or declared a total loss because of an accident, you may be obligated to pay a considerable amount to repay the loan — even after the proceeds from the sale of the car or the insurance payment have been deducted. If your budget is tight, you may want to consider paying cash for a less-expensive car than you first had in mind.
If you decide to finance, make sure you understand the following aspects of the loan agreement before you sign any documents:
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- The exact price you're paying for the vehicle;
- The amount you're financing;
- The finance charge (the dollar amount the credit will cost you);
- The APR (a measure of the cost of credit, expressed as a yearly rate);
- The number and amount of payments; and
- The total sales price (the sum of the monthly payments plus the down payment).