There is a difference between taking a car loan to buy a car within your financial limits and using it to buy something you can’t afford. Auto dealerships will tell you that you can afford and what you should actually be spending on a vehicle are two very different things. When it comes to financing a car, you need to think not only in terms of the monthly payment, but also of other important aspects.
Listed below are some smart auto financing tips for the smart buyer:
1. Understanding one’s credit score
The most important thing to check and track before approaching a car dealership is checking your credit report and score. Unlike credit cards and mortgages, car loans are usually given out even when one has very bad credit because banks can repossess the vehicle even if one cannot or won’t pay. Also, if you have bad credit and are excited about getting a loan, then banks won’t give you good rates either. So, it is better to understand your credit score using credit calculators and figuring out if you can qualify for even better car loan rates. Typically, buyers with FICO scores of 750 or better get the best interest rates– 2.9%, 1.9%, or sometimes even 0%; buyers with a low 700 credit score could still obtain a good rate, but might not qualify for the best promotions; and buyers with credit scores of less than 650 could be offered car loan rates of 10% or more.
2. Get financing quotes before going to the dealership
Try and shop for financing quotes before you head to car dealerships, particularly if you don’t have stellar credit. Online lenders are a great place to get accurate financing quotes and the maximum amounts you should be spending on buying a car once you submit a completed credit application. Most of the time, credit unions and local banks tend to offer buyers with less-than-stellar credit competitive interest rates on both used and new car loans.
3. Keeping the loan terms as short as you can afford
Loan terms that are shorter come with lower interest rates and higher monthly installments – but that is what you need. Sales representatives in car dealerships tend to negotiate and sell the financing based on lower and lower monthly payments which will attract your attention but will not reduce the price of the car. Instead, you will be paying so much more in terms of interest because the more time it takes to repay a loan, the more interest is charged. What’s more, banks tend to levy higher interest rates for loans that are longer, increasing the cost of credit even more.
4. 20% down payment
Driving off in new cars without having to put down a cent is tempting, but if you’ve already put down a larger down payment, then you won’t suddenly find yourself not able to sell your car if your loan amount is more than the worth of the car.