Owning a brand-new car can be rewarding and fun, securing financing can be scary. If you don’t have enough cash to pay for your car up front, however, it will be required. Many people spend
weeks making sure that they get the best possible deal on the car but to forget to research their financing options. If you’re not sure about your budget and your financial situation before you go looking for an auto loan, you’ll be more vulnerable to settling for whatever the dealer suggests, not what’s best for you. You may even have a higher interest rate than what you could have received had you done your research butbeing uninformed leaves you vulnerable.
What you want to do is consider not just the total cost of the vehicle, but also the monthly payment you can afford to make while still meeting your other financial obligations.Evaluate your income and consider whether this car is a good long-term investment. If you buy this car now, how will that change your quality of life? Should you really spend this much on a vehicle? Once you get an idea of what those amounts are, you can start shopping for financing.That way, before deciding what new car to buy, you have discovered whether you can afford to purchase a new vehicle in the first place. Here are a few things you should keep in mind.
1. Keep your eye on the total cost of the loan.
When you compare different auto loans, focus first on the annual percentage rate (APR) instead of what you’ll have to pay monthly. The APR can make a huge difference. For example, if you take out a $15,000, five-year loan, a 6% APR would cost you over $800 more than would a 4% APR.
Pay careful attention to the terms and conditions of your auto loan contract. The terms and conditions may include late fees, grace periods and the lender’s default options among other things.Know what you’re getting yourself into and ask as many questions as you must. If you have a shorter-term loan you will have to pay more money monthly, but your loan will be paid off much faster and you’ll be paying less to make the purchase.A three-year-long loan could cost much less than a five-year loan. Longer loans have higher interest costs even though the APR may be the same. This is not the case if you are able to secure a zero-interest loan.
No matter the APR, the longer the loan term the slower you build up equity in the vehicle. This means that during the initial life of the loan you will owe more money than the vehicle is worth, so if you want to sell it or trade it the value of the vehicle may not cover the amount of money still owed to the lender. This could also be the case if you must file an insurance claim due to theft or if the car is “Totaled”. You will receive funds based on the value of the vehicle, possible much less than you still owe. The two best ways to avoid this are shorter loan terms and larger down payments.
2. Shop around for the best deals.
The importance of this cannot be emphasized enough. The business of auto financing is gigantic and booming every year. There are many companies providing auto loans worth billions of dollars every year. The largest agencies are banks, credit unions, online lenders, and dealerships. It’s important to know what’s offered at each organization so you can safely make your pick. Don’t be afraid to mention a special being run at a different dealership you prefer, you may find they will match the rate or incentives in order to get the sale. There are several types of lenders, such as…
These lenders have very strict loan policies and they are usually less flexible. There’s very little leeway when you shop for auto loans at a bank. Banks tend to cater to only those with a good credit score. If you have one, this can be a great option, especially if you are an account holder – they want all your business, not just your checking or savings account. However, not everyone will beeligible for bank financing. You probably already have a relationship with one bank so that’s a good place to start your auto loan hunt. Don’t cave on the first offer. By starting the process well before you NEED to purchase a car, you have the advantage of time. If your only car went to the junkyard last week, then you don’t have as much leverage as you did two weeks ago.
These institutions operate similarly to banks but are usually non-profits with lower operating costs in comparison to banks. This also lets them lend you money at lesser rates than what most banks may charge. However, most credit unions only lend money to people who are members. Do you have a relative who banks at a credit union? Sometimes membership opportunities are there for certain groups as well as their families, it never hurts to ask. Some credit unions do go outside the norm and provide loans for people who don’t have an account with them. Visit your nearest credit union to find out whether you’re eligible or not.
Online lenders are usually the most convenient option but also may be the riskiest. You have several options to pick from with the incredible number of online lending platforms that have emerged in the last decade or so. Even some traditional banks and credit issuers have an online operation. Although they are convenient, these lenders also come with some concerns. Since everything is done using the internet, the security of your personal information is not always assecure as you might like. If there is an issue with your account, you can’t drive down to the corner office and discuss things with your account manager face to face. If you are only comfortable negotiating across a desk after a handshake and some coffee, this is probably not the way for you to go.
Dealerships go out of their way to arrange loans for you, by working with banks and other outside sources in large volumes. Although it’s a convenient option, their offers change frequently and vary greatly from dealer to dealer, especially for dealers who don’t specialize in just one make of car. But again, dealers want to sell cars to make room for new cars, so they do have an incentive to match another dealerships offer when they can. Purchasing your car in late summer also can lead to great deals since this is the time of year when dealerships want to unload their inventory to make way for next year’s models.
No matter where you choose to start looking, start looking well before you have to. Do your research, ask questions,know what to expect and always try and negotiate.