Almost 80% of all new car purchases are financed. So there are lot of players in car loan market. More…
Almost 80% of all new car purchases are financed. So there are lot of players in car loan market. More than likely your dealer will offer you its own loan as well. But remember, even though your car loan is approved at car dealership, it is not issued by them. They just provided a service to connect you to a bank that offers car loans. There is nothing wrong with it. In fact it is a convenience for those who did not look for a car loan before showing up at the car dealership. But it is going to be expensive. Expensive is a relative term and while 8% APR loan might be expensive to one customer, it might seem cheaper to another. So Here are some of the steps that you should take to make the best out of of car loan shopping process.
First of all, you need to understand the car loan approval process. When you fill out an application for a car loan, you’re supplying your credential to the financial institution. Their job is to transform all that data in to a single three digit magic number called credit score or FICO score. Every single person in United Sates with some credit history has one. Credit scores can vary between 300 and 850. Higher the score, better is your credit rating and more favorable rates for a loan. If your credit score if over 700, chances are you’ll get a decent rate. Problem starts when your score is below 600. If your score is below 600, don’t bother to submit a credit application with prime lenders. They will most likely reject your application.
There is another group of lenders called “sub-prime lenders” who deal with such kind of scores and loans. Since sub-prime lenders are willing to take more risk by approving a low credit score customer, their interest rates are often higher than prime lenders. As you can see, it makes perfect sense to know your credit score before you apply for an auto loan. So get you score first.
If you have a vehicle you want to trade in, the dealer will inform you the amount they are willing to offer. It is perfectly fine to do a “trade-in” as long as you don’t owe any money on the vehicle. However, it is very different financial situation if you owe money on your old vehicle. Remember, the dealer will payout the remaining loan and they will roll it up into a new auto loan. Chances are that new interest rate will end up higher than the previous one.
Things get even worse for people who own a vehicle that has less residual value remaining than the outstanding loan. Trading this vehicle will add more cost to your new vehicle. So rule of the thumb, try not to trade-in a vehicle that you have an outstanding loan on. A smarter solution would be to not buy vehicles that depreciate quickly and get you in trouble in the first place. For example, some auto dealers will sell you a car for about $20,000 even though sticker price (MSRP) is around $30,000. People tend to think that a deal like this is a great deal. It may be for the time being but when time comes to sell or trade-in this vehicle, you get the shock of your life. You may think that $20,000 was a deal but everyone else knows that it sells for even less than that and just a few months after you buy it, it is worth no more than $12-15,000. However, your loan balance is still probably over $15,000. So you have negative equity just a few months after the purchase and as time goes by, things are going to get worse. So be careful about the brand and choices you make.
If you have made up your mind on the make and model of the vehicle, you probably have some idea on the loan amount. Once you know the loan amount, you should consider financing 80% of the value. If you put 20% down, you will be offered a lower rate and that will save you money in long run. If you don’t have any money for a down payment, you obviously have no choice. Regardless of the situation you’re in, you will have to contact lenders for an auto loan. Your first preference should be your local credit union, as they are going to be cheapest due to the fact that they are non-profit organization. But sometimes it doesn’t work that way, so you need to contact your bank and some on-line lenders to get a feel of the current interest rates.
Applying to an on-line lender could be a fast and non stressful experience. You go to their website and fill out a form with the loan amount. If you’re approved, they will mail you a check for the loan amount that you could use to pay your dealer.
It is easy to persuade yourself to spend lot more than you planned once you get to the dealership. Maybe you had a 4-CL car in your head and ended up liking that expensive 6-CL model. The idea is to set the limit ahead of time and stick to it. A general rule is to use the 20% formula. All your monthly car expenses (including loan payment, gasoline, maintenance etc.) should not exceed 20% of your income. Also remember sales and local taxes. This is something most people ignore. If you’re buying a $20,000 car and live in a state with 8% sales tax, your final price is not $20,000 but $21,600. Most people wouldn’t even see this $1,600 tax until they get ready to sign the dotted line. So make sure you factor all of these extra expenses in your final price.