For many people, an auto loan is the most significant and largest financial transaction they make in their lives — at least until they get a home mortgage. Because it is so significant, it makes sense to take the right steps and avoid mistakes in the process.
1. First, shop around for auto loans at your local banks, credit unions, and financial companies. You don’t have to finance through your car dealer. In fact, by shopping around first, you’ll know if your dealer’s loan offer is good or not. When you talk to a bank or credit union, you may also be able to get pre-approved at a guaranteed interest rate and for a given amount. That way, you’ll know what price car you can afford when you go to your dealer. You are not obligated to accept any loan offer you receive, even those for which you are pre-approved.
2. Know your credit score. Your credit can make the difference between getting approved for a car loan or not. If you are approved, your credit score will determine the interest rate you pay and the down payment amount you’ll have to make. Car companies offer special promotional deals each month, such as 0% APR loans and low-payment leases, which require good credit. To get the best rates and best deals you’ll need a credit score of 700 or above. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
3. Keep your loan as short as possible. Many people are attracted to long loan terms, such as 72 months or even more, because it seems more affordable with lower monthly payments. However, the downside is that, unless you make a large down payment, you will be “upside down” on your loan for nearly the entire loan term, which will make it difficult to sell or trade your vehicle before the loan is finished. Long term loans also increase your overall costs significantly. For example, your finance costs for a $25,000 loan at 5% APR for 36 months is $1974. If you stretch out the loan to 72 months, your finance costs jump to just under $4000.
4. Make as large of a down payment as you can afford. Not only does a down payment make your monthly payments lower, but it also reduces your overall cost and helps you avoid being “upside down.” For example, your monthly payments for a $25,000 loan, 48 months, 5% interest rate, and $1000 down payment would be $553. If you increase the down payment to $5000, your payments come down to only $460.
5. Watch for monthly incentive car deals from car manufacturers. These are special deals manufacturers offer during a limited time. The incentives can be in the form of rebates, low-interest loan rates (or 0% rate), bonuses, or special lease deals. As we mentioned previously, you’ll need good credit to take advantage of interest rate or lease deals. However, if your credit is not-so-good you can still take the rebates and bonuses, which reduces the amount of loan you’ll need — and increases the probability of your being approved at a good finance rate.
If you are currently in the market for a new car, we suggest you get some free price quotes online before you begin visiting dealers. Many dealers offer better prices online than if you shop in their showroom — because their costs are lower with online sales. One online company, TrueCar, tells you what other people are paying for the car you want, and gives you a low-price guarantee that will be honored by your local car dealer. It’s a good deal.