New Car Loan Financing
Looking to get some new wheels without breaking the bank? Make sure to factor the cost of new car loan financing into your budget.
Buyers who forget to account for new car loan financing may find themselves with monthly payments they can’t afford.
Even with the economy moving toward recovery, more Americans are struggling to pay off their car loans. A recent State of the Automotive Finance Market report showed a 70% increase in motor vehicle repossessions.
To avoid becoming one of these statistics, it’s important to do some research before hitting the car lot.
These five tips can help equip you with the information you need to get a great deal on your new car loan financing.
1. Make sure you know your credit score
The interest rate you get for new car loan financing will be largely determined by your credit score.
Your credit score is a record of your financial history that gives lenders information about how trustworthy of a borrower you are.
Credit scores range from 300 to 850, with 300 being the worst, and 850 being the best.
There are three credit reporting agencies: Equifax, Experian, and Transunion. You can get a free credit report from each of these agencies once a year. Sites like CreditKarma will also allow you to access your credit score for free.
When shopping for new car loan financing, it’s a good idea to get your credit report. This way, you can go into negotiations understanding your credit score. In addition, you’ll know what kinds of interest rates are available to you.
If you have a credit score of 750 or higher, you likely won’t have any trouble qualifying for a competitive interest rate. By contrast, if your credit score is under 650, you may end up with a high-interest rate.
If your credit score isn’t great, you may want to consider taking some time to repair your credit before purchasing a new car.
If waiting isn’t an option, you should take time to research the best loans available to you.
2. Shop around for the best new car loan financing rate
A lot of car buyers don’t realize that they have options when it comes to their new car loan financing.
If you have a good credit score, you can most likely get a good interest rate on a loan from the dealership. If you have a lower credit score, however, it’s a good idea investigate other financing options.
You can even apply through your local bank or credit union before you go shopping for a car.
Banks and credit unions often offer good interest rates, even if your credit isn’t perfect. Not only that, having a financing offer can help you negotiate for an even better interest rate at the dealership.
3. Choose the shortest loan term you can afford
When it comes to financing, there are two main factors that determine how much you will end up paying. The interest rate, and the life (term) of your loan.
Depending on the price of the car you’re purchasing, you may have the option to choose a car loan of 3, 5, 7, or even 9 years.
While choosing a longer term for your loan will give you a lower monthly payment, it will also mean that the total cost of the car will be higher.
Also, keep in mind that, unlike purchasing a home, purchasing a car is not an investment.
While the value of your home should appreciate after you purchase it, the value of your car will always depreciate.
For this reason, if you take out a long-term car loan, you run the risk of ending up with an upside-down loan, where you owe more on your loan than the car is worth.
At the end of the day, those low monthly payments just won’t pay off.
4. Don’t focus on the monthly payment
In general, when considering the cost of a new car, it is a mistake to look at the cost of your monthly payments, rather than the total cost of the car.
When you go to the dealership, the dealer will likely ask you what kind of monthly payment you can afford.
Don’t fall into this trap. Dealers are trained to sell you on an attractive monthly payment. This way you won’t notice if you’re paying too much, or not getting the best deal on financing.
Rather than giving the dealer a monthly payment you’re comfortable with, give them your maximum budget for the total cost of the car. Otherwise, the dealer may try to sell you on a car more expensive than what you’re looking for by promising an affordable monthly payment.
5. Set some extra cash aside
Of course, even though the total cost of the vehicle is the most important factor, everyone would like to have as low of a monthly payment as possible.
One way to lower your monthly payment is putting down at least 20% of the purchase price in cash. Additionally, you should always pay for any taxes and fees in cash, rather than rolling these into the cost of your loan. These extra costs add to the cost of your loan, but don’t add any value to your car.
While some dealers will offer borrowers with strong credit a loan with no money down, and no taxes or fees at signing, it’s always better to put cash down. The more money that you finance, the more likely that you will end up owing more on the car than what it is worth.
Searching for a new car, and getting the best new car loan financing, can be a stressful and overwhelming process. But it doesn’t have to be.
Knowing and understanding your credit score, shopping for the best term, and prioritizing total cost over a long monthly payment can all help you get the best deal on your car loan.
Being equipped with this knowledge before purchasing a new vehicle can help save you hundreds of dollars. Quite possibly even thousands of dollars in the long run.
What is your experience like with car shopping? What strategies have you used to save money on a car loan? Leave us a comment below!
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