Auto Loans are Changing: Here’s What You Need to Know
Years ago, you could pick up a decent car for cheap, put a few miles and bucks into it, and be set for a handful of years. Those days are long gone. Most cars selling for under $10,000 need some TLC to even be considered worth purchasing. And we’re only talking used cars.
New cars are an entirely different story. Automotive manufacturers are asking more for their models due to the number of technologically advancements that new versions have over their 10-years-and-older precursors. In fact, brands probably have to price their inventory higher just to cover the costs of production. Higher costs at the plant correlates to bigger digits at the dealership.
The car-buying process is complicated enough, but when you add obtaining a loan to the mix, the way out can look like a whole lot of staircases to climb. We’ve gathered tips to cut down on those flights of stairs and guide you towards a better decision for the short and long term.
The first step is to be educated. So, grab a pen and take notes!
Begin with Credit Score
How much you qualify for in terms of an auto loan depends on a variety of factors, most notably your credit score. Maintaining a high credit score will help you in many areas of life, but in terms of an auto loan, it means you’ll have a lower annual percentage rate (APR), or what’s also commonly called an “interest rate.” To break it down, interest rates represent the cost of taking out a loan. The higher you can boost your credit score, the lower the APR will be.
Knowing how much to borrow depends on your financial situation. Even if you work a steady job and you’re confident that money source will be present for the life of the loan, budget towards the middle to lower end of what you can afford. Your best bet is saving money for surprise costs rather than spending it all on the car of your dreams — whether it starts or not.
How Much Car Can I Afford?
After you’ve made out a list of monthly income and expenses, figure out what funds are not going towards bills. This money is known as your “disposable income” and represents what you can use to pay for the costs associated with purchasing — and owning — a new car. It’s a common rule of thumb not to spend more than 20 percent of this monthly disposable income on a new car purchase, including loan payment, insurance, and of course, gas.
Have you realized yet that we’re not even at the dealership? Lots of new car prospectors walk the lot long before they’re truly educated on what they can afford. Don’t make the same mistake. Come to the dealership armed with numbers hovering in the back of your mind and you’ve already increased your chances of coming away with a better deal.
Evaluating Financing Deals
How do you find the best price on something you need? Many consumers these days are using the Internet, and so should you — at least for your auto loan. While brick and mortar lenders do still exist as a viable option, you can often get competitive quotes online for less hassle.
Knowing what you qualify for from a variety of lenders will not only help you budget, but it will also come in handy as a bargaining chip when you’re wheeling and dealing at the dealership. Lay down the gauntlet. If an online lender can do better, why should you go with in-house financing over a third party?
Choosing the Appropriate Length for your Auto Loan
Would you choose to repay someone over a short or long period of time? Most people might answer “long,” but the reality is, this isn’t always the best option when it comes to auto loans.
In fact, choosing a longer repayment period may end up costing you more than the car itself is actually worth. You could easily find yourself owing more than you could sell the car for — even if you’ve been paying on the car for a few years. Nerdwallet.com points out that dealerships often extend the life of a loan to make the monthly payments more enticing. What potential buyers should consider is not only the monthly costs, but the overall price of the car as well.
Rather than going for 72-month loans, like many new-car buyers do, choose the shortest repayment period you can afford. In fact, if you can pay for miscellaneous expenses up-front and in cash, do so. The less you have to finance and pay interest on, the better.
Other Factors to Consider
DetroitNews.com cautions interest rates may be on the rise, so the time to buy a new car is now, before the rates increase. However, rushing into a decision can be costly. If you find yourself unable to make a solid decision about a vehicle based on the loan options and budget you’ve come up with, there are some alternative routes.
Leasing, instead of buying, could be a good option for some. There are many factors to consider when leasing a car, but maybe you’re not sure what model you want. Think of leasing as an extended test drive, if you will. But if leasing sounds like a lot of paperwork and headaches, there’s always certified pre-owned vehicles. They’re a better guarantee than the “For Sale by Owner” on the corner variety, but as with all dealership offers, consider every cost. Make sure to question those line items you don’t understand.
At the end of the day, it’s always a good idea to sleep on a decision. Give yourself time to think about the situation from a variety of angles. Speak with friends and family and get their opinions. Don’t fall into the trap of buyer’s remorse after you get your new car home. Be smart, be prepared, and work that budget in your favor!