Three ways to take the stress out of auto financing
Buying a car can be a stressful and intimidating endeavor. Still, you have to admit that it’s also quite exciting. You imagine yourself behind the wheel of your new car. It gives you a sense of independence like you’ve reached an important milestone in your life. For this reason, many people tend to put a lot of effort into finding the perfect car. The one that fits their needs and personal taste. A reflection of who they are and what they value the most. By the time they have to think about auto-financing, they’re exhausted and too enthusiastic about using their best judgment let look how we can take stress out of auto financing.
While choosing the right car is essential, finding auto financing is an integral part of the process. Not many of us can afford to pay full price on the spot, so we have to look at financing options. This research is a lot less fun than comparing car models, but if you get a bad deal, you’ll end up paying more than you should or ruining your credit score. Many aspects may confuse you at first, and sadly, many dealers try to take advantage of your confusion. Before you drive off into the sunset, let’s go through some of the best ways of taking the stress out of auto financing.
Figure out how much you can afford
Once you’ve narrowed down the list of what car models and accessories you’d like and decided between buying new or used, it’s time to come up with a budget. Before you start shopping for an auto loan, you need to figure out how much you can afford and are willing to pay. Ensure that your budget covers both the car’s price and other costs of ownership, such as insurance and vehicle maintenance. You’ll also want to factor in taxes, title fees, dealer fees, and annual registration fees.
Many of us make the mistake of evaluating the loan only in terms of monthly payments. Be careful here because if you lower your monthly payments by taking a longer loan, you’ll end up paying more in interest. Let’s say you get approved for a $20,000 loan at an interest rate of 4.75%. If you pay it in 3 years, your total interest will be $1,498. If you took out the same amount for six years, you would have lower monthly payments, but your total interest will be $3,024. That’s more than double. You also have to consider that with a longer loan, you put yourself at risk of negative equity – you’ll owe more than what the vehicle is worth. This will become a problem in a few years if you want to trade-in or sell it to get a new one.
When calculating how much money you can spend on your car every month, add the cost of gas. If the amount turns out to be higher than what you’re comfortable with, instead of prolonging your loan, which many dealers suggest, consider taking some time to save for a larger down payment, buying a less expensive car, or fewer features and options. Another solution is to shop around for the best financing sources. We will cover this in the next section.
Explore your loan options
Now that you know how much you can afford to spend, you can move on to the next step, exploring your loan options. Getting a better understanding of the loan process will help you save money, and if you bring a loan quote from a bank or other lender to the dealer, you’ll be in a better position to negotiate with them. You’ll also know if it’s a good idea to stick with the dealer’s financing offer. Most people first look for a vehicle and then auto-financing, but this isn’t a good process. As we’ve said, you first want to determine how much you can afford, because you will get attached to that vision of yourself driving your dream car and you’ll be disappointed when you realize it might not be feasible.
Shopping for auto financing is quite complicated. We don’t want to lie to you. You can start with banks, credit unions, and dealerships. Remember that you’re just making inquiries. Don’t sign any contracts at this point. You’ll also want to compare their offers with nonbank auto financing companies and online lenders. Having an established relationship with a lender helps, but it’s not necessary. These lenders can preapprove your application for a loan, and the preapproval will include the maximum loan amount depending on your credit score, interest rate, loan lengths, and terms.
We also need to talk about dealer-arranged financing. This type of loan means that the dealer collects all the relevant information from you and then forwards it to several auto lenders. What you’ll be doing as well, if their lenders approve the loan, they will send the dealer a quote – the buy rate. The offer you receive back from your dealer will often be higher than this buy rate because it includes their fee for handling the financing. They are allowed to do this, but since they’re the ones that set a higher rate, you can negotiate a better deal with them.
You’ll also see a lot of “No Credit, No Problem!” offers. Be careful with these. If you have poor credit, you may still be able to negotiate better deals directly with the lenders. The interest rates from these dealerships are often much higher, and they may outweigh the benefits of getting a new car.
Now you have offers from several lenders which you can compare and use during negotiations. You’ll also want to check your credit score. There are many free resources online that explain how you can do that. If you have a good credit score, you can use it to your advantage. If you have poor credit, it’s not a deal-breaker, you can work around it. For instance, you can save up for a larger down payment that means you’ll need to borrow less money, and it gives the lenders a sense that you’re serious about this purchase, that you’re not a risky investment.
You can increase your down payment by selling your current vehicle or by trading it in. For this, you’ll want to research its value to get a sense of how much you should get. Look online for examples of similar vehicles in your area that have sold recently. Usually, in case of a trade-in, the dealer will decide the value of your car. You can use your research to negotiate or decide to sell it yourself.
Let’s take a look at what you can and cannot negotiate. You can negotiate the price of the car, interest rates, add-ons like service contracts, extended warranties, credit insurance, and extra features for your vehicle like alarm systems, tire and wheel protection, or window tinting. You can’t negotiate registration fees, vehicle titles, and taxes since the government sets them.
Take Stress Out of Auto Financing
Learning about all these aspects ahead of time will make negotiating your auto loan a lot less stressful.