How to Pay for a Car — Everything You Need to Know

A car is the second most expensive real asset that most people have, and one of the biggest purchases most people ever make. It’s a big decision and can have a meaningful impact on your monthly budget and financial position. So, how do you pay for a car? We’ve compiled out best tips and tricks.

To finance, or not to finance?

Many of our customers choose to pay for their car with financing even if they have cash on hand — there are a few benefits to doing so.

  • Build your credit: Financing an auto loan can build credit in a few ways. Expanding your available credit and maintaining a history of on-time payments can improve your FICO score. Auto loans are a type of “installment credit,” which means they are paid in fixed installments over a fixed time period. Many lenders view installment credit more favorably than “revolving credit,” like credit cards. You can learn more about credit score basics at Transunion.
  • Build an emergency fund: Personal financial managers generally recommend keeping enough money to cover 3-6 months of living expenses in the bank or a liquid investment account to help deal with unexpected major life disruptions, such as illness or job loss. If you don’t have an emergency fund, it may make sense to prioritize your money to start one and avoid going into debt when unplanned expenses occur.
  • Get a better return on your money: Many Shift customers get low interest rates on their auto loans, starting at 2-4% for well qualified buyers. Instead of paying for the car in cash, some choose to invest that cash to try to earn a higher return. The average term of an auto loan is 5 years. Morningstar Index Performance Return shows that the annualized returns of major stock indices over the past 5 years range from almost 9% to over 18%.Morningstar Index Performance Return
    For example, Jane Smith is deciding between paying cash or financing her $20,000 car purchase at a 3% interest rate. If she chooses to invest, such as in a low-cost index fund, she could grow that $20,000 to more than $32,000 after five years (assume 10% rate of return, where 10% is the average long term return in the stock market). She would pay less than $1,600 in total interest for the loan. That leaves her with more than $10,000 because she decided to invest instead of paying in cash. Consult your investment advisor to see what makes sense for you.
  • Protect your investment without paying everything upfront: Almost half of our financing customers choose to include a vehicle protection plan or gap coverage in their loan. These plans can be a good way to protect against the unexpected costs of owning a car, from breakdowns to accidents. They can typically be included in your financing package, so you don’t have to pay the full cost up front.

Although there are many benefits to financing your vehicle, there are also things to keep in mind.

Cars and taxes: your guide to maximize your money. 

What to consider in deciding how to pay for a car

  • Budget for interest cost: Unlike the 0% APR loans you may have seen advertised for new cars, interest rates for used cars won’t be lower than 2-4%. This means you will pay some amount of money every year in interest. Check out our car loan calculator to understand the cost of interest for your loan.
  • Be aware of hidden fees: Prepayment fees, balloon payments, or other hidden fees can catch borrowers off guard. Prepayment fees, for example, are charged by some lenders if you decide to fully pay off your loan prior to a certain date. If you finance with Shift, you don’t have to worry – Shift financing does not include hidden fees.
  • Shop around: Different lenders may offer different interest rates and terms to the same borrower, so there is a benefit to shopping around. When you apply for financing with Shift, we instantly provide you with the best offer from multiple lenders, so you get the benefit of shopping around without the hassle.

If you’re still deciding how much you can afford, we’ve built a handy car loan calculator to help you find a car that works for your budget. Even if you can afford to pay in cash, financing may make sense if you have better uses for your money, as long as you pay your monthly installments in full and on time. If you decide to finance, you can easily apply today from your Buyer Dashboard or from shift.com.

Please be sure to read your loan contract for the full terms of your specific loan.

Image via Alexa Mazzarello

How to Calculate Car Payment

One of the most common discussions we have with customers deals with matching the right car to a given budget. It can be tough! We’ve seen cars that cost less than $10k, one car that cost $138k, and thousands of cars in between. So here are our tips for how to calculate car payment.

To help you better calibrate your car budget and get a better sense for the Shift inventory that matches it, we’ve created a quick and easy car loan calculator.

Try out the new car loan calculator >

Calculate your car payment by month

We generally have two types of financing conversations with customers. The first is when they have a max price in mind and are trying to figure out what their loan terms will look like. The other is when they have a specific amount budgeted for their monthly payment and are trying to figure out what cars they should be looking at.

With our new car loan calculator, you can easily calculate for either scenario. Just use the “calculate max price” or “calculate monthly payment” tabs and input your down payment, interest rate, and loan length and let the calculator do the rest.

View available inventory based on your budget

Car loan calculator image 2Once you’ve calculated either your max payment or total price, we make it easy to see exactly how many cars in our inventory match your budgeting criteria. This will give you a total price, so remember to factor in tax and extras like warranties or gap insurance.

You’ll never need to spend mental energy filtering out cars that aren’t in your price range again.

Try out the new car loan calculator >

Or, let us calculate the car payment for you

At Shift, we offer a tool that lets you shop for cars based on your predicted loan terms, so you can view cars based on what your monthly payments would be. We’ve already done the math for you, so no calculations required!

Want to give it a try? Shop by payments.

Shipping Shift: a Spring Product Roundup

Now that spring is upon us, the new season marks a moment for us to reflect on the past several months of product development at Shift. We’ve been hard at work filling in gaps to build Shift into a streamlined car buying experience for you: Continue reading “Shipping Shift: a Spring Product Roundup”

Financing a Car: Why It Can Be So Difficult

After multiple years in the industry, customers continue to tell us that one of the biggest hurdles to buying their next set of wheels is getting a loan for it. So why exactly is financing a car so difficult?

For starters, it’s not an easy pill for financial institutions to swallow. To banks, used cars are pretty risky. The bank doesn’t have the knowhow or the time to verify that the condition of a car is worth the loan its underwriting. So, if they needed to seize a car they made a $10k loan for, only to find out it’s one breakdown away from the scrapyard, they don’t want to be left holding the bag.

Whereas banks can be relatively certain that a new car will retain a large amount of its value, there’s no such certainty with a used car.

To make a used car purchase easier, we knew we had to provide some solution to this problem. Our answer? Inspect the cars we sell to make sure they’re in great shape, and use that to forge our own relationships with banks. Then, bake a seamless financing experience right into our product.

If you’re in the market for a used car and need a loan, you’re no longer out of luck. Check out our inventory and click “Start financing” to get the process started. Happy driving!

Browse cars

Two New Financing Options for Shift Customers: Ally and Santander

Starting this month, Shift customers will now have more options and a better chance at getting a low rate when financing their car. We’re happy to announce that Ally and Santander are joining Shift’s network of banks that will compete on your loan application. Continue reading “Two New Financing Options for Shift Customers: Ally and Santander”

Used Car Financing Just Got Much Simpler (Finally)

“Boy, that was an easy auto financing experience” isn’t something you often hear. At its best, auto financing today is a cumbersome process. At its worst, it’s a predatory nightmare. The financing difficulties we’ve experienced firsthand were a major “aha” moment that’s informed Shift from day one.

Ever since, improving the process has been high on our priority list. Working with our team and partners, we’ve made a lot of progress on this front and today we’re happy to highlight the major improvements we’ve made to make auto financing smoother and simpler than it’s ever been. Continue reading “Used Car Financing Just Got Much Simpler (Finally)”