Before we get into what makes a great car loan, here are some mistakes you’ll want to avoid:
Know your creditworthiness
- Basically, creditworthiness determines your ability to repay borrowed money and is based on your credit score. The higher your credit score, the better car loan rate you will receive. By knowing your credit score prior to stepping foot at the dealership, you will be saving yourself a potential higher rate than what you deserve.
Don’t put add-ons on your car loan
- Extended warranties, paint sealant, credit insurance and the like should not be added on to your car loan. You can and should get those from an outside party rather than paying interest on these services and items. In fact, if you see any fees on your car loan that you don’t understand, never hesitate to ask. Discuss each rate involving your car loan separately to avoid anything being included that shouldn’t be.
Negotiate the purchase price, not the monthly rate
- There is nothing wrong with having an idea of what type of payments you can afford on your car loan each month. But, keep that number to yourself. You may end up paying more on the vehicle if you focus on the monthly rate with the salesman instead of the overall price due to increased interest rates.
Shop around for your vehicle AND your loan
- You should not only shop around for your vehicle, but for your auto loan as well. It’s OK to not get your car loan from the dealership. Check with your bank, a credit union or even an online lender to compare rates. You may want to even check out these rates before you go to dealership. Rates are typically a percentage point or two cheaper at credit unions than banks.
When looking for an ideal car loan, there are a variety of factors to look for and consider. These include:
The loan’s total cost
- When looking at car loans, review the Annual Percentage Rate (APR). The lower the rate, the more the savings. The APR you are able to receive does also depend on your current credit score and credit history, a new or used vehicle and the length of the loan. If you have a decent credit score (660 and up), you should be able to get a 4-7% APR, depending of who is providing the loan. Obviously, the better your score, the better rates you’ll receive. Of course, this number does vary.
The car loan’s terms
- To simplify this, the shorter the term, the less you’ll pay in interest. Longer-term loans also take longer to build equity as well. If you can, you should also try to include a large down payment. Cars are almost always depreciating assets so you don’t want to get suck with long term loans what will put your net worth in the red.
- By having a variety of details prior to sitting down with a car salesman, you give yourself much leverage. You’ll have more bargaining power if you are able to provide numbers from other loan sources and the like.
- Look for car loans that allow you to pay in advance or make extra payments without any penalties. These fines, if you will, are often not called “penalties,” so be sure to read the fine print. Again, ask about any terms you do not understand to avoid any financial surprises. Cruddy car loans are hard on your self confidence as well as your pocketbook.
By paying attention and being prepared, you can work toward receiving the best car loan for you and your budget. Remember to look at necessities in the vehicle first (how well it functions) over the frills (special luxury features) unless you have the funds to do so.
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Photo credit: Dave Cawley