A young woman sitting in a cafe, researching car loans on her smartphone

Does financing a car cost more?

Few buyers have enough money to buy a car outright with cash. But if you’re financing one, you’re probably wondering: Am I paying more than I should?

Yes, is the short answer. Financing a car simply costs more in the long-run. But the majority of buyers rely on auto financing because it allows them to get a car immediately instead of saving up for years. The important takeaway is that when you choose to take out a car loan, you want to keep your costs as low as possible.

Below, we break down what affects your financing and how you can lower your financing costs.

 

What affects financing costs?

 

When you finance a car, you’re being given a loan that pays for the car. You then have to pay that loan off.

Financing raises the cost of a car in several ways. The most obvious reason for this is interest charges. Every month, you’ll be charged interest on your loan until you pay it off. Negotiate a better interest rate and you’ll pay less.

We compiled a blog post that looks at how different interest rates can significantly affect your monthly payment. Take a look.

Now, with financing, you’re also potentially paying additional costs in the form of penalties. When you finance a car, your loan will have various conditions. For instance, if you pay the loan off early, there may be a prepayment penalty. You may also face a penalty if you refinance your vehicle (that's when if you get a new loan with a better interest rate to pay off the old one).

 

How do you lower your financing costs?

 

The number one way to lower your cost is to find the lowest possible interest rate before you buy your vehicle. This is by far the most important consideration when you get a car loan

Also crucial is your total loan amount. How much you borrow is going to have a large impact on your monthly payments. It may be worth looking at buying a less expensive car to bring down your overall cost.

Finally, the penalties of the loan will impact your overall costs. It’s often worth getting a loan that offers no prepayment charge when you pay your loan off early. This can save you hundreds or even thousands of dollars off the total cost of your loan.

Also, look for loans that have low penalties for refinancing. After all, if interest rates fall as you’re paying off your loan, it’s worth paying a bit more to refinance at a lower rate.

 

Final thoughts

 

Yes, financing a car costs more than buying one outright. But few people have the luxury of being able to pay cash for their new ride. That’s why it’s important to know how to bring down your overall financing costs.