We want to help our customers out by giving them helpful tips to finance a car. Whether you plan on financing a brand-new car or a used car, it’s important to calculate what you can afford and what you should expect when you get your loan. We don’t want our customers to get caught in a bad car loan, so let’s prepare you with these 6 tips.
1. Know Your Credit Score Before Shopping
Before you start shopping for your car, it’s important to understand what your credit score is or where it’s at. Unlike a mortgage, you can still get a car loan with bad credit, but the interest rate will be significantly higher. The lower the credit score is, the higher the interest rate is. With that being said, knowing your credit score can help you understand what sort of monthly payments you’ll be looking at. Based on that, you’ll know how much of a loan you’ll be able to take out and the budget of how much you should buy a car for.
2. If You Do Have a Low Credit Score, Get Financing Quotes
To put your car buying mentality to reality, getting financing quotes can go hand-in-hand with point number 1. You’ll be able to truly see what to expect with a loan and what you can realistically afford. You can also get financing quotes from banks or lenders you have good history with. If they know you and have record that you make your payments on time, they may cut you a lower interest rate than a lender you’re matched with because of different loyalty reasons.
3. Keep Term as Short as You Can Afford
It may seem like a short-term solution to get a loan with a longer length, but in the end, you’ll be spending more money in interest and it can set you up for other monetary problems if you should decide to trade-in or sell your car. Getting a shorter loan term may mean a higher monthly payment, but you’ll save money in interest. The faster you payoff a loan, the less amount of interest you’ll pay over time. Not to mention that a common problem with longer loan terms is that, when it comes time to sell the car or trade, the car may not be worth the price you owe.
4. Put 20% Down
One of the top tips we’ve given customers is that it’s important to put money down, and a common rule of them is to put 20% of the cars total amount as down payment. The more you put down towards the initial cost of the car, the less you have to put into a loan, and the more money you will save in the long-run.
5. Pay Any Additional Dealer Fees or Extra Fees in Cash
There are bound to be other fees that are not included in the initial price of the loan: documentation, license, registration, sales tax, etc. These should be paid in cash and not rolled into your total loan amount. While the dealership can add these fees to the loan amount, it will ultimately increase what you owe and increase the monthly payment. This means more interest added on to the amount than you previously would have paid.
6. Consider GAP Insurance
The guaranteed auto protection insurance is offered by car dealers and lenders as protection towards your vehicle. It is sold to you to cover the financial “gap” between the amount that your insurance company thinks your car is worth and what you owe on your loan. In the event that you get into an accident and total your car – despite whose fault it is – you can ensure that you won’t owe anything on your car if your insurance company deems your car is worth less than you owe.
For example, your car may be worth $10,000, but you still owe $12,000 due to interest calculations and the depreciation in value.
When You Should Refinance Your Car Loan
If you didn’t see our article in time and you’re stuck with a bad car loan, that’s no big deal! If you have good credit and your car isn’t too old, you can refinance your car loan like you would a mortgage. You can get auto loan refinancing quotes with a different lender or even with your current lender. Your local credit union can also be a great place to check out your options.
When or if you decide to refinance, make sure you ask about any fees that come with applying or initiating the loan, and avoid lenders that want to lower you monthly payment by extending the term of your loan. The goal is to aim for a lower interest rate AND pay down the loan over the same time frame or a shorter loan term.