If you are in the market for a new or used car, you may wonder if you should finance your car through a lender or save the funds necessary to buy the car outright. Although buying a car outright can save you the money you would pay in interest on a vehicle loan, it does not help you build your credit history. In most cases, financing a vehicle will help you establish or rebuild your credit, increasing your ability to qualify for future loans.
Buying a New Car
Buying a new car typically involves using lenders associated with the dealership where you purchase the vehicle. In some cases, the vehicle manufacturer may own a financing company -- if you obtain the loan through the manufacturer's finance company, you may be able to take advantage of special incentives such as low introductory interest rates or waived loan origination fees. Some dealerships also work with third-party lenders to provide loans for their customers. Manufacturer-owned financing companies and third-party lenders typically report to credit bureaus as you make your loan payments, which can help build your credit history.
Buying a Used Car
The lending process for buying a used car is typically the same as for buying a new car. However, unless you buy a certified pre-owned vehicle, you will typically obtain your loan through a third-party lender rather than a manufacturer-owned finance company. Some dealerships work with more than one lender, so they may be able to provide lending solutions if you have less than perfect credit. Financing a used car through a third-party lender will usually help build or rebuild your credit history.
Buy Here, Pay Here
If you have poor credit or have not established a credit history, you may have difficulty obtaining traditional financing for a vehicle. You may need to purchase a vehicle at a "buy here, pay here" dealership, which typically handles financing in-house -- you pay installments directly to the dealership instead of to a third-party lender. Not all "buy here, pay here" dealerships report payments to credit bureaus, though. If this type of dealership advertises credit reporting, obtain a statement in writing that the dealership will report your timely payments to help you establish or rebuild your credit history.
Considerations
When considering a new or used vehicle purchase, evaluate your current income and expenses carefully to make sure that you will be able to afford your loan payments. Financing may help you obtain a newer, higher-quality vehicle than you could afford by paying with cash; however, if you overestimate your ability to make installment payments, financing can lead to a negative credit history and can make bad credit worse if you miss payments. At worst, the lender can repossess your vehicle, which can cause severe damage to your credit.
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