Not everyone can purchase a car with cash on the spot. Most people actually have to prepare before getting a car. They have to earn enough money for the down payment, settle the monthly payment agreement, and make sure that other operational costs can be handled. Purchasing a car isn’t as straightforward as some people may think.
This is why, more often than not, people opt to get a car loan. When the model they choose is not necessarily affordable, lending companies can help them get over the hump. However, what most people take for granted at the start of the whole thing is that there’s a difference between using a car loan wisely and using one to buy cars you can’t afford.
For example, there could be a car loan of your dream car that is affordable on paper, but you can’t actually sustain in the long run. Normally, the dealership would tell you what you can afford and what you should spend are two very different things.
Generally, you can look for car affordability tests or calculators around the internet. However, if you want to judge it for yourself, you can look to evaluate your own spending potential using the following measures.
First, get a good grasp of your credit score
Before anything else, you have to check your credit score. This can easily define whether or not you can afford that car you’ve always wanted, or at least you can judge whether you’re ready to take a big step into getting a car loan. Unlike mortgages or a credit card, you can usually get a car loan even if you have pretty bad credit, but you will just have to pay more. The reason? It’s relatively easy for the banks to repossess a car if you don’t pay.
Now, if you go for the loan, make sure that you do your research about everything that goes along with it. One of the most important things to consider is you credit score. This can greatly affect the turnout of the car loan. What you can do is to look for free tools online like Credit Karma to help you understand your credit score. Once you know your credit score, you can figure out if you can qualify for the best car loan rates.
Also, dealerships would often advertise very good interest rates on new cars, even up to a zero percent interest rate. What dealers leave in the fine print is that these rates are only available to buyers with the best credit. This means that you need a FICO score of 750 or better. Buyers with credit scores in the low 700s can still get a good interest rate but may not qualify for the best promotions.
The bottom line is that the better your good credit score is, the better car loan rates you can get. As such, you should keep your finances updated and free from any red marks.
If you already have a dipping credit score or if you are in the middle of a financial battle, say you are in an IVA, you might find getting a car loan more challenging. However, there’s still hope. There are IVA companies like Moneybarn and Creditfix – Individual Voluntary Arrangement that can help you get your finances back on track and still get that loan for your car.
Get finance quotes as much as possible
As mentioned before, if you have an excellent credit history and you know it, you can usually get the best financing rates right from the dealership. Then again, if your credit score is only average, you can benefit from getting some loan quotes before you hit the dealership.
This is very important to understand because it could really mean the difference between actually getting a good deal for a car loan and getting yourself into deeper financial troubles.
Typically with lenders that have an online platform, you can complete a credit application then immediately get the interest rate together with the maximum amount that you can spend on a car. The good thing about starting with these financial quotes is that they give you important information that can help you decided whether to use the loan or not in case the car dealer gives you a better deal.
Most of the time, local banks and credit unions can offer the most competitive interest rates on both new and used car loans to those borrowers with the average credit score. Additionally, you may also be able to use the prearranged financing as a bargaining chip with the dealership’s finance and insurance manager and still score an even lower interest rate if you have average or above average credit score.
Look for the shortest term possible
Obviously shorter terms will come with a higher monthly rate, but the overall cost can be significantly less.
Most car sales professionals will try to negotiate with you based upon your monthly payment, not the overall purchase price of the car. By doing so, the sales representative can show you lower payment schemes by extending the term of your loan, not by reducing the price of the car. In fact, you might be paying much more in interest, thus, you are paying more every month.
However, the general idea is that the longer you take to repay a loan, the more interest you have to pay. Furthermore, more often than not, banks charge higher interest rates for longer-termed loans, further increasing your cost of credit. It’s really tempting to stretch out an auto loan over five or even six years to get to a more comfortable monthly payment, but this means you have to pay a lot more in interest, almost matching the life of the car itself.
In addition to looking for short term car loans, it can also be beneficial for you to put more money down before getting to a loan. A no-down-payment deal for a car is surely very tempting, but it might not be worth it if you consider the effect of this financial decision to your future. If you find yourself suddenly needing to sell your new car, you may not be able to do so if you owe more on the loan than the car is worth. A larger down payment ensures this doesn’t happen.
Use cash payment for taxes, other fees, and extras
Make it a habit to pay for taxes and other fees with cash – not only do they typically cost less, but they also do not inflate your monthly dues to a point where it’s too much for you to handle. Do not finance the miscellaneous expenses involved in your vehicle purchase such as sales tax, registration fees, documentation fees, and any extras you choose to purchase, like extended warranties.
Remember, the less credit under your name, the less interest you have to pay.
Dealers typically roll some or all of these fees into your financing. Unfortunately, doing that may not be a good idea. Yes, there is convenience to the financial package. However, this kind of bundling can keep you more tied up to your car loan, at least for a while, since you’re increasing the amount of your loan but not the value of the car you’re securing the loan for.