Getting a Loan
Buying a car can be a lot of fun.
Figuring out how to pay for it? Not so much.
Unless you have the luxury of paying cold hard cash, you'll need to deal with auto financing. Financing requires just as much thought and time as figuring out what car you want to buy. If you don't make the right decision now, you might penalize yourself financially and cause headaches for yourself for years to come.
So with that in mind, let's look at some of the things you should think about when considering an auto loan.
It Pays to Compare
For starters, shop around for the best loan rates. There are three ways to do this:
- Call around to local banks and ask what the interest rates are for car loans. Start with your own bank or credit union; credit unions often have better rates than banks.
- Check your local paper, which should publish a weekly list of area bank rates.
- Perhaps easiest of all, just visit one of the online sites that lists national and local bank loan rates, as well as those of online lenders.
Use the annual percentage rate (APR) of the loan as your benchmark when comparing. A difference of just 1% adds up over a loan's lifetime.
Be sure to check out online lender sites, too. These sites have great rates and a variety of contract lengths. It's surprisingly easy to process your entire loan application online, all without changing out of your pajamas.
Finding out the cost of a loan doesn't take a math degree. Most online financing sites have calculators that crunch the numbers for you.
Homeowners should check out using a home equity loan for a car purchase. Not only do these have favorable rates, your payments are tax deductible. You can't beat that.
Of course, you can always go with dealer financing. The dealer might have the best deal available―if not, find the best rate elsewhere and ask the dealer to beat it.
But beware when dealing with the dealer. The dealer's just the middleman, and usually it's the most expensive way to go.
Of course, those 0% financing deals sure do seem attractive. And sometimes they truly represent a terrific deal. But be aware that most of these deals come only with short-term leases―usually three years or less. Also, to qualify for the funding, your credit will probably need to be top-notch. And you'll probably have to make a large down payment, sometimes as much as 25% of the purchase price of the car.
And even if you do qualify for the low financing rates, it's quite possible that the dealer is making up for the loss on the loan by inflating the price of either the vehicle or some of the popular options available on the car.
If you decide to go with dealer or manufacturer financing, make sure the transaction is completed and approved before you leave the dealership. If you fail to do this, the dealer might call you in a few days to tell you that the financing fell through, and then try to stick you with another lender at a higher interest rate.
Factors Affecting Your Interest Rate
The exact interest rate you'll pay depends on a number of factors. At the top of this list is your credit score. The higher your rating, the lower your rate. It's a good idea to obtain a recent credit report, just to make sure someone hasn't been using your credit to buy Florida timeshares. Sometimes a report is so riddled with errors, big or small, that it causes your loan application to be rejected.
The longer the length of the loan, the higher the interest rate you'll pay. And usually, used car loans have higher rates than new car ones. Also, it's easier to get a longer-term loan for a new car than for a used one.
The most popular loan contracts are for either 48 or 60 months. Longer lengths enable you to have a lower monthly payment, and they also might make a higher-priced car suddenly fit into your budget. But before you sign on the dotted line, figure out what the total costs will be, interest and all. More months equals higher interest rates equals more money. Also, be aware that most financial gurus advise against having a loan longer than 60 months.
A long loan length also may not make sense if you don't want to keep the car for more than a couple of years. Consider also that the longer you keep a car, the more repair bills you'll have. So with a longer-term loan, you might occasionally face the prospect of having both a car payment and a large repair bill in the same month.
And keep in mind that having an existing loan makes it more difficult to trade in a car.
Other Matters to Consider
In determining your monthly payment, some financial experts say that you shouldn't spend more than 20% of your disposable monthly income toward the payment.
And what about the size of the down payment? The more you can afford, the better. Try to go with at least 20%, even if the dealer will take 5%. The larger the down payment, the less time you'll be "upside down" on the loan, meaning that you actually owe more on the loan than the car is worth. This situation occurs from the rapid depreciation that most new cars experience once they've been sold.
Some lenders may offer you credit insurance, which provides protection if you cannot pay off the loan due to death or disability. Although some lenders will require that you take this insurance (at an additional cost to you), most will not. Check your existing insurance policies, as you might already have this coverage.
Lastly, look for flexibility in your car loan. Ask for contracts that allow you to pay extra each month or allow you to pay off the loan early without any penalties.
If after reading all this you think a car loan isn't for you, consider the alternative of leasing a vehicle instead. Although you don't really own the car, sometimes the monthly payments are lower―meaning you can get more car for your money.