While some brokers and lenders will tell you that “a loan is a loan,” the truth is that car loans are not a one-size-fits all product. It’s difficult for many consumers to comprehend this because loans look like commodity products. At the same time, some loans are overly complicated or charge unnecessarily high fees given your credit score. Here’s how to choose a good loan and prep for the sale.
Check Credit Reports First
Before you apply for a car loan, know what you qualify for. This is a good habit to get into for every kind of loan you take out, not just a car loan. Check your credit report. It’s freely available from annualcreditreport.com. You get one free peek every year. This report will tell you all of the good, and bad, remarks lenders and other creditors have left you. If you see any mistakes, dispute them with the provided dispute process. This will help you qualify for more favorable loan rates.
Always Shop For The Best Rate
Sometimes, the best rate from the bank just isn’t good enough. A valid option is to check with your local credit union, as they might be able to offer you a deal a bank cannot.
Go With A Short Loan, Or One That Can Easily Be Financed
The shorter the loan, the better. Alternatively, get yourself into a loan that can be refinanced later. That means, you want a loan with no prepayment penalty. Fortunately, these types of loans are relatively common in the industry.
Don’t Always Take The Dealer’s Deal
Don’t always take the dealer’s deal – don’t get your loan through a car dealer, unless you know you’re getting a good interest rate. Dealers may be able to offer a good loan rate if they are offering you preferred financing. This will be financing that is underwritten by the auto manufacturer’s financing arm.
Usually, you will see this advertised as 0 percent for 60 months or a low rate like 2, 3, or 4 percent.
However, in some instances, dealers may charge a higher rate and cut a deal with the issuing bank. In these deals, the interest rate may exceed 8 or 10 percent. The bank may charge 8 percent, and the dealer will add 1 or 2 percent to the loan. This is sort of like a commission for the dealer.
There’s no reason to pay the added interest rate, however, if you can go directly to the bank.
Choose An Affordable Monthly Payment
Choose a monthly payment you can afford. It does you no good to get a “deal” on a vehicle and not be able to make the monthly payments. At the same time, you don’t want to get too hung up on those payments. Ideally, a loan rate will be one where the resulting monthly payment is affordable for you, and the monthly payments will not exceed 20 percent of your income.
Focus More On The Total Payments You Will Be Making
At the end of the day, it’s all about the total of all payments, plus interest, that you will be making on the loan. Who cares if your payment is $10 lower, with certain financing options, if you end up paying $1,000 more in interest over the life of the loan? You want a comfortable payment, but you want to balance that with the Shopping for a Car: 6 Insider Secrets to Consideroverall outlay.
Andrea is the Chief Chick of Smart Money Chicks. After filing BK twice (once because she panicked, second time because the pro messed the first time up), she realized that it all could have been avoided if she understood more about how her Finances worked and the options available. At that point, she wanted to help as many as she could never make the same mistakes again. Our Promise is that all the content you read on here is created or edited by Andrea