These days, cars have become a necessity. Even so, it’s not actually an investment. On the opposite, cars devalue or lower in value over time. That said, it is not wise to pay interest on an auto loan.
Why? In most cases, the car’s value drops and depreciates quicker than you pay off the loan. So, what happens? You are left underwater or upside down, meaning you owe more on the car loan than the worth of the car.
Most of us need cars to travel here and there, yet don’t have the money to buy one. Thus, you apply for an auto loan. However, there is a huge difference between using the loan smartly and using it to purchase a car you simply can’t afford.
For a little help, here’s how you can finance a car the smart way.
Know Your Credit Score
Before you go to the car dealership, make sure you understand your credit score. Unlike a credit card or mortgages, you normally can obtain an auto loan or car finance even if you have a low credit score. However, you just need to pay more.
You might wonder why you need to pay a lot more. Well, take note that it is simple for the banks to retake a vehicle if you fail to pay or go default. Even so, if you have bad credit, you tend to get overly excited and appalled to get a loan. Thus, failing to ask or inquire if there is a much lower and affordable rate available.
Keep in mind that car dealers clearly know this, and they make lots of cash on it. So that you’ll know your credit score, there are many online tools you can use to do this.
Moreover, once you understand your score, you can then discover if you can be eligible for the best auto loan rates. Car dealerships will, more often than not, publicize great interest rates on brand-new cars, for instance, 3%, 1.5%, or even 0%.
However, in the fine print, these superb car loan rates are only available to those with a good credit score. Although buyers with a not-so-good credit score can still acquire a good rate, they might not be eligible for the best deals.
From there on, interest rates rise at high speed. Additionally, buyers with credit scores that fall under the below-average category might be offered with rates of at least 10%. That said, the lower your score is, the more vital for you to shop around and ensure you are getting the best interest rate a bank can give you.
Get Financing Quotes
For buyers with excellent credit scores, lucky them! Usually, they can get the best rates right from the car dealership. However, for those with shaky credit scores, you can try online lenders.
Here, you fill out a credit application and are offered with a maximum amount and interest rate you can splurge on the car. The best thing is that you do not have to make use of this loan if the car dealer offers you a much better deal. At least you know that you have a rate to beat when you walk through the door.
Moreover, credit unions and local banks can offer buyers with bad credit the most reasonable interest rates on both used and new auto loans. Here’s even good news, you can utilize the pre-arranged financing as a trading chip with the insurance and finance manager of the dealership and get a lower interest rate.
Opt For A Term You Can Afford
What you want is a short loan term because it usually comes with a much lower interest rate. However, with higher monthly payments. Keep in mind that the longer you take to pay off a loan, the more interest you have to pay.
However, that is not all. In most cases, banks will charge you high-interest rates for long terms. Thus, raising your cost of credit.
Put 20% Down And Pay For Taxes With Cash
Aside from keeping the loan term as short as possible, it is wise to put a 20% down payment. It might sound like a no-brainer. However, most dealerships do not even need buyers with excellent credit to put any down payment at all.
Moreover, pay for fees and taxes with cash. Sometimes, dealers add all these fees into your loan, causing you more damage on your loan. That said, you are raising the loan amount, yet not the car’s value securing the loan.
The best way to purchase a vehicle is with cash unless you are looking at a low APR or 0% interest rate. So, if you need to get an auto loan, be as sensible and practical as possible. Understand your credit score, shop for a loan, and keep the loan term as short as you can afford.
Chrissy Ryland - I'm a freelance writer and blogger from Northern California. I grew up loving all things entertainment and travel and now I am blessed with a career that lets me write about both of those topics along with many others. For inquiries about a story you think I might want to cover, please contact me at firstname.lastname@example.org