Purchasing a car is a necessary evil. While we wish we did not have to, we all need to get to our jobs and various other places. The big mistake many people make is to try and make this process as short and as painless as possible.
They go into a dealership, order a car and move on. While this is understandable, it does pay to take a little more time to understand how the process works, especially the financial aspect. In this guide, we share with you:
10 things you need to know about auto financing
Set Your Budget
Before visiting a single dealer, set your budget. When it comes to auto financing, setting your budget will help you avoid costly mistakes down the road. While setting your budget, be aware that there is a difference between what you can pay and what you should pay.
Wise buyers know this and never get caught up in buying a car just because they can afford it. Go through your finances and set an upper limit of what you are willing to pay, both as a monthly installment and as a total budget.
Your Credit Score Matters
Car dealers love this one. If your credit score is perfect, the car dealer will almost never offer you the better deal you deserve. If you are comfortable paying they will not change your mind. On the flip side, if your credit score is poor, they will throw the worst deal at you and make it seem like you cannot negotiate.
In either case, understand your credit score and know what it means in terms of the rates you can get. Also understand that the rates advertised by a dealer are not always for everyone. Being aware of your score will help you know how and when to negotiate.
Cars Are Not Assets
Cars depreciate quickly. The new car you just bought lost 10% of its value the moment you drove out the dealership. Because of this, paying interest on a depreciating item seems unwise. It is. But because of necessity, taking loans to buy cars is acceptable. Understand that cars are not investments or assets, they are essential liabilities.
What you need to be careful about here is that the value of the loan does not at some point exceed the value of the car, what is known as going upside down on your loan. To avoid this, calculate your repayments and costs so you know you will not cross this mark at any point in your loan repayment term.
Take A Short-Term Loan
This is an excellent way to reduce the amount of interest you pay. Have you ever wondered how a dealer can give you ever lower monthly payments? The secret is they just extend the loan term further.
This translates into higher interest payments as well as higher financing costs. Do not fall into this trap. Try and get as short a term as you can. While this may translate into higher monthly costs, the final cost you pay will be lower.
- You May Like | Tips for Getting a Secured Loan
Put A Minimum 20% Down Payment
If your credit is good, the dealer may not require any down payment on the car. You can simply sign the papers and drive off. This is tempting but it will cost you more in the long run. Factoring in interest, you may find yourself upside down on your loan.
In addition, all other costs associated with the sale will only be rolled up into the financing, adding to your interest payments and overall cost. To offset all of this, put a 20% down payment. Several studies have calculated that 20% is that “sweet spot” number for money down in terms of getting the best financing deal and lowest interest rate.
Pay Financing Requirements In Cash
Whatever you do not pay for in cash attracts interest. Think about that for a moment. If the dealer pays sales tax for you, they will charge you interest for that. If they pay for financing fees, same thing. This just does not make sense.
Use the down payment to pay for all these fees, taxes and extras so you do not get charged interest on them. Failing to do this will only add to the overall cost of the loan and will in most cases guarantee that you will end up upside down on your loan in no time.
Consider GAP Insurance
Guaranteed Auto Protection insurance is a type of auto insurance that pays off the difference between the value of the car and the value of the loan in the event of an accident.
It makes sense because if you find yourself upside down on your loan, you would not want to have to pay the difference because the insurance company pays you less than you owe.
While most auto owners never utilize this insurance, it is an option to consider especially if the gap you are facing is significant. GAP insurance typically costs a few hundred dollars per year.
Perhaps you have already purchased a car with unfavorable terms, what do you do? You can easily refinance it in the same way a home is refinanced. This is even easier if your credit score is good and the car is in good condition.
Simply go online and request refinancing quotes from lenders. Another option you may have is getting a title loan against the car for your personal needs. You may need to get more information on title loans though to understand how they can benefit you.
Compare Rates Online
Auto financing rates differ from lender to lender. Dealers also have their own rates as they act as brokers for lenders. To avoid getting a poor rate, shop around online for quotes. Most lenders and brokers have rate calculators that factor in your credit score and other factors.
Walking into a dealership armed with some quotes is a safe way to negotiate a better rate for the car you are buying. Flying in blind means you have no points of reference to counter the rates being offered by the dealer.
Have All Documentation Ready
Going to the dealer unprepared is a poor way to start negotiations. If you are unaware of your credit score, do not have employment and income details available and so on, the dealer will have the upper hand.
Take time to put together all your documentation so you are ready to talk numbers with the dealer. Having your papers ready will also mean you can choose to accept an offer on the spot if the dealer gives you a favorable deal.
To Sum Up
Auto financing requires the same patience and attention to detail as when purchasing a home. The value may be significantly less and depreciating but it still does not make sense to leave money on the table when you do not have to.
Following this guide will help you get the best auto financing rates and options for your next car purchase.