How To Be Smart About Car Financing
A lot of car buyers opt for financing their purchase. When handling the process, they look at the upfront costs and evaluate monthly repayments, rates, and terms, but often overlook the total cost of financing. This leads to unnecessary costs, spurring buyers to ultimately pay more than the car’s value.
Keep reading to learn the best practices of obtaining affordable car financing the smart way.
Know Your Credit Score
Check your credit score before you walk into the dealership. It is one of the primary criteria that determines the rates and terms you’ll be offered. Similar to credit cards and mortgages, you’re less likely to get an attractive car loan if your credit score is bad.
For instance, if your score is 750+, you have a high probability of getting the best rates as well as access to promotions. On the other hand, scores less than 650 means you’ll sometimes have to pay an interest rate of 10% or more.
Once you know your credit score, you can get an estimate of the deals and even try getting preapproved. With a weaker credit score, the best practice is to shop around to find the best available deals.
Shop Around
When you have stellar credit, accessing the best deals is no big deal. Yet, what if your credit score is low or bad? In these circumstances, you will have to make extra effort to identify the best offers.
Ample research is the best way to accomplish this. When possible, look at lenders that offer preapproval or prequalification options which don’t involve a hard credit inquiry. Armed with an idea of representative interest rates along with the potential loan limit, it can be easier to shop for a car that fits your budget.
Don’t limit your search to just dealerships and online lenders, but also explore financing options from banks and credit unions. Try collecting and comparing as many quotes as you can to choose the best fit. In the best case, pre-approval at this stage might help you negotiate even lower rates at the dealership.
Keep The Term Short
It is also essential to watch the loan terms. A shorter loan term will help you obtain a lower interest rate, however, the monthly payment will likely be higher than a longer-term loan. Yet, the longer you stretch out car loan repayments, the greater the total interest you will pay over the life of the loan.
For instance, a car loan of $25,000 at 3.11% for 3 years would amount to a total of $26,217. This involves a monthly payment of $728 and a total interest of just $1,217 over the loan duration. However, the same loan for 5 years means a monthly payment of $450 and total interest of $2,026.
Accordingly, it is important that you try and keep the repayment term as short as possible to save a substantial amount of money. Longer terms mean you’ll end up paying more interest, which in turn might also lead to negative equity.
Try To Put Down At Least 20%
When you are considering financing an auto purchase, you are sure to pay more than the car’s value due to interest. However, you can reduce the amount of interest paid over the life of the loan by increasing the down payment amount.
Let’s say the cost of the car is $20,000. If you can handle a 20% down payment, or $4,000 in this case, you’ll just need financing for $16,000. When you finance a lower principal amount, you’ll be eligible for better rates given there is less risk involved. You can also select a comparatively shorter term to repay the principal, thus saving extra on interest.
Don't Forget Cost Of Financing In Total Price
Calculating the cost of financing while working off the total price is extremely important. Most dealerships will charge additionally for registration, documentation, add-ons, extended warranties, sales tax, gap insurance, and more. It is a good idea to not include these costs in the total amount you finance if possible given it only increases the chance of going upside-down on the loan.
If you negotiate well, you can save a good amount on overall financing costs. Hence, negotiating on the cost of financing for the total vehicle price is much more helpful when determining the total price, rate of interest, and loan term.
Conclusion
Unless you find a 0% APR loan offer or an extremely low rate, the best way to get a new car is by paying in cash. If that’s not possible, opt for financing. When you do so, be very pragmatic about it. Use the steps listed above to understand your potential rates and loan limits in order to negotiate better terms and save money over the life of the loan.
