How to Buy Your Dream Car: Strategic Financing

You want your dream car. It could be $10,000 or it could be $1,000,000. Regardless of the price, a dream car is something you’ve set your heart on because your brain shoots sparks when you see it. To get said dream car, you need money. I can’t exactly tell you the best way to make money, there are many. However, I can tell you how to gain or use your financial stability as leverage to get access to funding at the best interest rate possible to buy the dream car you’ve always wanted.

In many cases, the cost of the car will determine your method of purchase. In some parts of the world, the age of the car will be too. There are some lenders out there that will finance the purchase of a 1980s supercar, but many won’t.

Heck, a 12-year-old Mercedes-Benz SLS at a Mercedes-Benz dealership near me right now requires a cash purchase. Some lenders require the vehicle to be less than 10 years old, some are stricter than that. Many lenders go by a maximum of 7 here in Canada. If you want a longer loan duration, I’d expect you would need to have a half-decent credit score.

It’s important to understand your finances before committing to such a large purchase. If you are hoping to buy your dream car, this is one of the few times I would suggest taking emotions out of the equation.

Excel spreadsheets are your friend. If you’re capable of putting together your own, it’s a great way to get a clear picture of your finances. It doesn’t have to be overly complicated. Otherwise, there are many pre-made budgeting spreadsheets available online that you can purchase for a small fee.

You should aim to keep your car budget between 10-35% of your monthly take-home pay, to leave some room for other expenses. Including those for the vehicle. While this is definitely wise financial advice, it’s all dependent on your personal financial situation. You need to ensure you consider debt, savings, and all of your monthly bills, however big or small. In my personal opinion, for most, 20% would be more realistic.

Don’t let a vehicle purchase put you in a financial chokehold, especially if it is your dream car. It can cripple you and that will kill the enjoyment of your ownership.

Having a good credit score is important if you want to borrow money at a good rate of interest. Favourable interest rates and term lengths will be granted if you score well.

Finance or bank loans require credit checks to measure how valuable or risky you are to the bank if they lend you the money to purchase a vehicle. If you have a good credit score, you are valuable and trustworthy in their eyes.

But it’s not just about being trustworthy, it also has to be worth their while. If you’re someone who doesn’t borrow money or uses a credit card and pays it off fully each month, they don’t make any money on you.
One of the best ways to be appealing to a bank is to be reliable and let them make a buck from lending you money.

• • Know your starting point. The first step is to obtain a copy of your credit report. Review it for errors and dispute any inaccuracies.
  • Pay your bills on time – Your payment history is the most significant factor when it comes to determining your credit score. Schedule them to be paid just after each payday if you can.
  • Keep your credit card balance low. Aim to keep the balance around 30% or below, and avoid using more than 70% of the available balance.
  • Settle any delinquent accounts. The sooner this is rectified, the sooner you can improve and negative records on your credit history.
  • Monitor your progress. Be patient – Building good credit takes time, but stay consistent and be persistent. You will be rewarded with lower interest, longer term lengths or increased borrowing allowance.

If you purchase from a dealership, one of the most common ways to get funding for a vehicle is to take out a finance agreement for your purchase. It is likely to be a similar process around the world, but finance is usually easiest to get at a car dealership. In the UK, there are many lenders and brokers that work independently from dealerships.

When you get finance, you will be offered a term length and interest rate which will determine your monthly payments. In most cases with finance, you will be required to pay a deposit.

If you decide to opt for finance, I would strongly advise going with an open loan. This allows you to make lump-sum payments or pay off the entire remaining balance.

Something many people do not know when it comes to bargaining on price; cash is not the best payment method for getting a lower price, finance is. Dealerships get paid on finance deals. So, if you do have the cash for the vehicle, knock them down on price, take out finance on it, and pay it off. Just make sure it’s an “open loan” and you don’t have to pay a fee when you want to pay it off early.

Usually, the lowest interest rates are found with bank loans. However, there are sometimes limits on how much you can borrow. Many bank loans are designed for lower amounts compared to your average car finance agreement. But there are some great benefits to getting a bank loan over purchasing finance on a vehicle.

Bank loans often come with more competitive interest rates than dealership financing, while also offering more flexibility with loan duration and repayment options. Furthermore, bank loans are much simpler to wrap your head around, unlike finance packages which may include more complicated terms and conditions.

Another pro to taking out a loan with a bank; you own the car from the get-go, giving you more flexibility if you decide to sell the vehicle.

You might think the best way to pay for your dream car without paying any interest or fees is to save for it yourself. However, there are some considerations to take into account.

First of all, you may be in for a long ride. Second, as some used car prices rise, the amount you save might not keep up with the increase in price which may result in you saving for longer, paying more, or missing out altogether.

Cash is not king, cash flow is. Most cars are a depreciating asset, so using cash for any large purchase isn’t always a wise decision. It ties up a substantial amount of money that could be used for emergencies or other financial goals. You should consider diversifying your financial investments. Furthermore, a cash cushion is always a good idea to increase your financial security.

Another factor that will require your best mathematical skills is calculating the rate of inflation compared to a fixed interest rate. As an example, you could save for four years and inflation would rise by 3% per year, totalling 12% over the four years. But if you could get a loan over four years at 9%, you would be saving 3% on your purchase, even though you are paying for the luxury of borrowing money.
Although we don’t know exactly how much inflation will have risen four years into the future, we can use our best judgment based on previous inflation history.

Inflation erodes the purchasing power of your money over time. By borrowing money at a lower interest rate than the predicted inflation rate, you can pay back the loan with less valuable money.

If you do decide to save for a car on your own, you should make sure you have a savings account that pays the highest interest possible. This way, you could reach your goal to get the amount you need sooner if you stick to a good saving schedule.

Do not get yourself into paying horrific interest rates on your vehicle purchase if you don’t need to.

If you used a credit card to purchase a vehicle, some people might fall into the trap of only paying the minimum payment each and every month which will result in you paying a substantial amount more in interest. For any significant purchase such as this, you need structure and predictability with your spending.

At the very most, you could put the dealership deposit for the vehicle on your credit card, but I wouldn’t take your time to pay it off. Use your bank loan, finance agreement or savings to clear it so you can stick to your monthly car repayments without the additional expense of your credit card balance hanging over you.

Some of the information in this article may not be relevant to your situation or the country you live in, but as a general overview of purchasing a vehicle, it’s likely that the methodology behind my recommendations are similar. And although I am unaware of the money you have to spend, buying your dream car (or any car) is achievable with proper financial planning.
Keeping your credit score high is essential to getting a low-interest, flexible loan.

We can summarise the information above like this:

• • Dealership loans are a convenient financing option, but for the best rates, I would suggest opting for a bank loan.
  • I wouldn’t personally use savings to make a high-cost purchase if you have the ability to get a low-interest loan. It may be more cost-effective when you consider inflation over the period of time it would take you to save for the full amount.
  • I would suggest saving up to cover a percentage of the vehicle and then finance or get a bank loan. This way you can reduce how much you borrow.
  • Don’t purchase a vehicle using a credit card, but leaving a deposit is fine, just don’t delay paying it off.

When purchasing any vehicle, you need to choose the option that best fits your financial objectives after taking inflation, interest rates and your monthly budgeting into account. Do your due diligence with your finances before committing to a large purchase. This means calculate your monthly budget and sticking to it once you see the car in the flesh. It’s easy for your plans to fly out the window once you’re sat in the car you’ve set your heart on. It may be your dream car, but keep your emotions at bay. I wouldn’t want you to hinder yourself by getting into a bad deal. Use your head on this one, budget properly and make sure the car you’re looking at is the right one for you.

In the end, you can buy your dream car without needlessly straining your finances if you practice wise financial management. With patience, you will get there. If you’re looking at the prices of new cars and are questioning why they are so expensive, you should read my article.

Best of luck with your dream car search!

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