As much as you’re raring to get behind the wheels and zoom your dream car off the lot, for some of us more budget-conscious babes, the dreaded car loan may be in our way. And as tempted as we are to just get it over and done with, don’t be in a hurry and sign the dotted lines of the first offer you get. Car loans, as “easy” as they are to get, come with a lot of underlines—the loan amount, loan terms, total accrued cost, effects to your credit score, interest rate, hidden charges, potentially selling your soul to the debt devil… Obviously, there’s a lot you need to think before you ink the deal.
So, without further ado, here are a few things you need to know and do before buying into car finance.
Decode your credit score
It’s as good a time as any! Before you apply for a car loan, check your credit score. No two lenders use the same scoring system, but the information they use will be more or less the same. Rates also depend on the provider that extends the loan, whether that’s a bank, auto loan dealer or dealership. Having said that, a pre-estimated credit score (especially if it’s a good one) places you in a better position to negotiate for the best car loan rates.
Usually, companies will extend loan offers despite bad or shaky credit but charge more in the process. Remember, the lower the credit score, the more you pay. Sneaky, sneaky! All the more reason for you to shop around for good deals first.
Find the best interest rate
The interest rate on a car depends on a lot of factors—the lender, loan type, loan duration, repayment method and so on. Before you zero in on the interest rate, find out the best bargain that meets all your requirements. Remember: low monthly payments are directly proportional to high interest rates. So the less you pay every month, the more you actually pay in interest in the long run. Yikes!
The most cost-effective car loan is one that is secured by the car itself. But be sure to be responsible with your payments. If you don’t keep up with them, you run the risk of the lender forfeiting your car!
Check the loan term
Speaking of loan terms… The shorter the loan term, the higher the monthly payments but the lower the interest rate. Mostly, sales reps try to negotiate a car loan based on the monthly payment rather than the price of the car. Result: you tend to pay more, at a much higher interest rate, and for a longer duration. Complete bummer!
Don’t fall into the trap of stretching the auto loan for over a five or six-year period. As tempting as low-monthly instalments seem to be initially, you. will. regret. it. And if you calculate backwards, the total interest you’d pay for the car for the life of the loan will turn out much higher than the value of the car! Cars only depreciate in value honey, so this is not a win-win situation.
Calculate the total cost
Now that you’ve found out your credit score and the best interest rate, take time out to calculate the total cost before you give the green signal to the loan dealer and seal your monthly payments.
Get into the intricacies and break it down to every dollar spent. Find out the total loan amount. Check if there’s a down payment that you have to pay. Figure out how much are you paying over the course of the term.
When you understand all the underlying factors, you could save up to thousands of sweet, sweet dollars, so do the work and knuckle down on the specifics!
Hidden fees and charges
There is nothing like a good deal when it comes to a loan, but every lender has his way of including obscure, undisclosed fees and charges in the total loan amount.
From loan establishment fees to break fees, defaulting payments and extended warranty fees, the hidden costs add up to the loan amount borrowed and repaid. Find out about all the fees you are likely to pay over the full repayment period and compare these charges to the price of the car to better negotiate for a ‘good’ deal!
Cash-out the extras!
So you’ve hit the last stretch. You’ve done all your research and are this close to closing that deal, but there’s still a little bit more to go. As you’ve probably figured out by now, purchasing a car comes with a lot of miscellaneous expenses even after buying the car itself. This includes sales tax, registration fees, documentation fees, extended warranty fees and so on.
Our best advice? Pay all your extras in cash! As much as the loan providers would be happy to dole out cash covering these extra costs in your financing, it’s a bad idea! These ‘extras’ do not increase the value of the car. Instead, they only increase the loan amount and the interest that would be eventually rolling out of your pockets for the loan term.
Ultimately, even if you’re thinking of financing your car, make sure you save up enough to cover these extra costs. We know it’s not the easiest thing to do, what with the holidays coming up, but don’t get discouraged! It’ll be worth the wait in the long run, and future you will thank your safe for a job well done.
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