For many people, making major purchases can seem scary, especially when there are many zeros on the price tag. Some of the common major purchases that people make include houses, cars, boats, and motorbikes. Depending on income and preference, people might save up money to pay down the entire purchase or take out a loan to pay back over a certain period.
There is no right or wrong way to finance a major purchase, as it all comes down to factors such as income, credit-worthiness, personal preference, and availability of options. Here are some of the different ways to finance major purchases, broken down by type of purchase.
Financing a House
Houses are a great investment option because their value keeps appreciating over time. Here are two of the many options available for financing a house purchase.
Conventional loans are usually offered by lenders such as banks and credit unions. Unlike federal loans backed by government agencies, these loans are governed by Fannie Mae and Freddie Mac. The Federal Housing Administration sets loan limits for these types of loans, and these can range from 15 to 30 years.
When applying for some of these conventional loans, a borrower has a better chance of getting a good loan if they have a good credit score in the high 600s. Additionally, a debt-to-income ratio that is lower than 50% qualifies one as a good borrower.
Additionally, if you have significant savings set aside for purchasing the house, taking out a conventional loan is a good financing option. However, if you are putting down less than 20% as a down payment on this type of loan, you would need to obtain private mortgage insurance. Putting less than 20% down on the loan simply means that you own less than 20% equity on the house.
With seller financing, you can finance your home purchase by eliminating the need for a bank or other third-party lender. Here, the seller of the house acts as the bank, allowing you to create an arrangement in which you, as the borrower, pay back the seller over a set period.
Seller financing also avoids the hassle of the closing process and its associated fees. However, the simplicity of the entire process largely depends on the seller. Some sellers can end up being more complicated than banks, while other sellers can make the closing process seamless.
Financing an Auto
The process of financing an auto is somewhat like that of financing a house. However, cars are usually cheaper than houses and depreciate over time, unlike houses that constantly appreciate.
When taking out an auto loan from a bank, you need to remember that getting a good loan depends on credit-worthiness and the amount paid down on the car when purchased. Your credit score greatly influences the interest rate on the auto loan, with higher credit scores qualifying you for a lower interest rate.
It is also advisable to pay down as much as you can for the down payment on the car loan. Paying down at least 20% on the loan allows you to have a shorter loan term, over which you pay less interest on the loan.
You should also take some time shopping around for loans with short terms and cheap interest rates that can fit your budget. Sometimes you can find independent lenders that offer good rates on car loans in your area. For example, a small company called Oportun provides auto loans in California, with the goal of making the borrowing process more accessible and personal for borrowers. This helps borrowers avoid the hassle of borrowing from banks.
You could also apply for an auto loan directly from your local credit union. The advantage of borrowing from a credit union is that since it is a member-owned cooperative, it offers much lower rates than other banks.
Credit unions also tend to be more lenient with members who have lower credit scores, providing an alternative to the higher interest loans offered by banks.