If you are looking to finance a vehicle, you first need to understand how car financing works.
Advertisements
The practice is very common in Brazil and in 2021 alone, sales of financed vehicles increased by 6.8% compared to 2020, according to data from B3.
Financing is like a loan and allows you to purchase a vehicle without having to wait for the cash payment.
Financing works for purchasing both new and pre-owned vehicles as well as used ones.
But how does car financing work? Find out everything about it in the text below!
Car financing: how does it work?
Car financing works like a bank loan. You pay the amount in installments, but the car seller receives the money immediately.
Since this full payment was made by the financial institution, you will pay the money back to them with interest and some fees.
Interest is basically the bank’s payment for “lending” you the money.
When financing cars, the buyer's salary is one of the main factors taken into consideration. However, financing a car is possible for a large part of the population.
Simply adjust the down payment, quantity and installment amounts, taking into account each person's financial situation.
Who can get car financing?
There are some requirements to be able to finance a vehicle. You must:
- be over 18 and under 70;
- have proven income – the means of proof may vary according to the profession (through pay slip, bank transactions, etc.)
- have a good credit history – basically, an analysis of your financial history will be carried out to find out whether you pay your bills on time, your level of default, etc.
- Both individuals and legal entities can finance vehicles.
Read also: Credit Card Interest Rates: How They Work and What to Watch Out For
What documents are needed to finance a car?
By meeting the basic requirements, you are very likely to be approved for car financing.
But beyond that, what you need to finance a vehicle is the documentation. Generally, the documentation is simple and not very bureaucratic.
You will need to present the original documents and a copy of the following items:
- ID card;
- CPF;
- proof of marital status;
- proof of income (pay slip or bank statements).
What types of vehicle financing are there?
To understand how car financing works, you need to take into account the different types of purchase.
These are two of the main ways of financing.
Consortium
The consortium is based on a group of people who have the same interest. To do this, everyone pays monthly fees to a company responsible for managing this money.
In this case, there is no interest rate, but you need to keep an eye on the fees charged by the administrator.
Furthermore, the installments in this model may vary according to the value of the car in the Fipe Table.
Every month a draw is held to see who will be the winner. Therefore, you only have the car in your hands when you are drawn.
It can be a good option for those who are not in a hurry to buy a car.
CDC
Direct Consumer Credit (CDC) is the most common and simplest type of vehicle financing.
In this model, the consumer requests credit from the bank, which keeps the car until the end of the installments, acting as a payment guarantee.
If the buyer does not pay the installments, the bank can seize the purchased property.
Interest rates are fixed from the start of the financing, but the buyer can make advance payments whenever possible.
What are the advantages of taking out vehicle financing?
The biggest advantage of financing a vehicle is that you don’t need the full amount to have the car in your hands.
Of course, with a consortium you may need to wait a little longer, but you are still dividing the amount in such a way that the payment is affordable.
With CDC, you can pay off your installments in advance whenever you have some extra money left over. This way, you save on interest and also reduce the total number of installments.
Vehicle financing is advantageous even for those who do not have a very high salary, as it is possible to carry out good financial planning and negotiate the value of the installments.
Read also: Best Banks: check out a complete list with 7 options
What to consider before taking out a car loan?
Understanding how car financing works is the first step.
The second is assess your financial situation. Therefore, be honest with yourself so that you don’t get into debt in the future.
Be aware of all your fixed expenses (rent, internet) and variable expenses (grocery, food, gas). If your budget is tight, identify which unnecessary expenses you can cut from your budget.
Also analyze your purchasing needs. Do you need the vehicle right now or is it worth waiting a little longer and saving a larger amount for a down payment?
Choose a model that is within your budget. It is better to buy a used car now and trade it in for a new one later than to pay for a car that you cannot afford at the moment.
When doing the math, don't forget to consider in your planning all the values that are not explicitly stated in the installment.
A car is never just a car, you will also need money for gas, IPVA, possible repairs, insurance with 24 hour assistance and etc.
Considering all the variables, remember that buying a car is not impossible. The most important thing is to have financial planning.
It is possible to finance a vehicle even with a minimum wage. If this is your case, save a good amount for a down payment.
Therefore, when taking out financing, interest rates are reduced and you do not need to commit a large part of your salary to the installments.
The ideal is to commit, at most, 30% of the salary. Use a financing simulator to have more precision in calculations.
Another tip is to know how to choose the most suitable financing option for you. And for that, count on the help of ConsultaCred.
Conclusion
Now that you know how car financing works, you can start planning.
Even if you don't start financing immediately, financial planning is essential to make your dream of buying a car and acquiring your dream come true. financial freedom.
