Many people overlook one key aspect of the process when shopping for a new car. Excited about the automobile, they treat financing as an afterthought. This is a mistake. The nature of the financing deal plays a significant role in the enjoyment of the car.
Here are some things you need to know before applying for a car loan.
What You Can Comfortably Afford
One of the first questions a car salesperson asks is what monthly payment you can afford. When you answer, they always respond with “Up to how much?”
In other words, whatever number you say, they treat this as your baseline and try to get you to increase the amount so they can maximize their profit. This is why it’s key to have reviewed your household budget to know exactly what you can afford to spend on your car each month.
Keep in mind; this number should also include ownership costs such as fuel, insurance, maintenance and annual registration fees.
By the way, you always want to keep your negotiations focused around the price of the car rather than the monthly payment
Your Credit Score
This is one of the most important factors of which you need to be aware. Your credit score will determine the interest rates you’ll be offered and, in some cases, whether you’ll be able to finance a car at all.
Yes, companies like RoadLoans help people get a car loan with bad credit, which is great for helping them accomplish things to better their lives. Keep in mind though, the lower your credit score the more expensive that car loan will be.
A Pre-Approved Loan is a Strong Bargaining Chip
First of all, you’ll feel a lot less anxiety about the process when you know your loan is already approved and what the monthly payment will be based upon the loan amount for which you’ve qualified.
However, this also puts you in a great position to get an even better deal.
You can use your pre-approved loan to put the dealer’s financing in competition with your lender. Worst-case scenario, you’ll get the good deal with which you entered the dealership; best case, you’ll get an even better one.
Long-Term Loans Are Dangerous — and More Expensive
There was a time when 36-month auto loans were the industry’s de-facto standard. Buyers made 20 percent down payments, financed cars over three years and that was that. Of course, the average transaction price back then was considerably less than the $32,000 it is currently.
Five years is the typical term these days, with some people going out as far as six, and even seven years. This does make monthly payments more affordable. However, it also makes loans cost more. The longer you’re paying interest, the more your out-of-pocket expenditure will be. Further, you run the risk of having your loan balance exceed the market value of the vehicle.
Here’s the takeaway; if you have to push the financing of a new car past 60 months to make the payment fit into your budget, you should be looking at a less costly automobile.
Always Pay Your Old Car Off in Full
The desire for instant gratification can be powerful. So much so, it can lead otherwise rational people to make less than optimal decisions. One of these is combining the remaining loan balance on a trade-in with the price of a new car and financing the total.
Sure this gets you out of your old car, but that old loan is now added to the new one. The result? You’re now effectively paying off two cars, even though you only have one. What’s more, this is a surefire way to owe more than your new car is worth.
Sell your old car on your own, use the proceeds to pay off the loan.
These things to know before applying for a car loan will make a significant difference in the nature of the financing you’ll get. Remember, the thrill of getting a new car lasts a few weeks — maybe even months — but the car loan will be around for years.