Several consumers spend days to find a car for the lowest price but neglect to look for best auto loan. This is a big mistake! Consumers who have not planned about their financing and visit car dealerships are vulnerable to dealer’s offer of auto loans with high interest rate. Moreover, dealers increase loan interest rate beyond what buyers really qualify for. Therefore, buyers can wind up spending significant dollars across the loan period.
If you are considering a car loan then you will desire to offset its full cost with affordable monthly instalments. Placing total focus on monthly payment can increase the odds of ending with a bad deal. Look at the big scenario and understand how auto loan works. When car shoppers lose their perspective, they can fall in common traps of focusing on monthly instalments and need to buy specific features or car even against your affordability.
So, be smart and decide what you are ready to spend prior going in search of your dream machine.
Tips on what to look for while getting a car loan
Check APR rate
While comparing car loans, you need to focus on the figure of annual percentage rate. Low rate can offer crucial long-term savings, e.g. three-year loan of $15,000 with 5% APR can make you save $500 in comparison to same loan offered at 8% APR.
Consider loan length
Loan length can significantly affect total financing costs and monthly payment amount. Short term means a high monthly payment figure but overall less money gets paid. Therefore, try to keep a loan duration as short as possible.
For example, if you borrow a loan of $15,000 at 6.5% APR for duration of 36 months than monthly instalment is $460. Total interest to be paid will be $1,550. This same car loan if extended to 60 months will decrease monthly instalment to around $293 but it will double the interest to $2,610.
Building equity concern
Long term loans can lengthen the stretch of time before you start building car equity. For e.g. with 60-month loan tenure, it can take 18 months for repayment or more before the value of the car increases than what you owe for it.
It means if you wish to resell car early then the price you get will not cover the remaining debt amount. This situation is defined as being upside down. Similarly, if your car is involved in a crash or stolen, insurance coverage will be insufficient to reimburse the remaining loan amount.
Short term loans decrease the duration of remaining indebted. For e.g. with 3-year loan, you can build substantial amount on vehicle equity in the first year, itself. It is recommended to have down-payment or trade-in of minimum 15% of the total cost, while financing new car purchase.
Other things to consider
- Shop around and research different resources. Consult another lender prior stepping at the dealership. You will be equipped with good knowledge of what other options are open. This will give you a potent bargaining power.
- Auto loan needs to be flexible. It means not having to pay penalties for extra payments or paying the total loan. Remember prepayment penalties are forbidden in several states.
When you take a car loan, your lender is already secured because they can seize the car in case of missed instalment. Therefore, focus in protecting yourself.