Car Loans 101

Kyle Crowe

March 3rd, 2015 | Posted in Money Tips
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1) If you’re buying from a dealership, financing (getting a loan) is often offered by them through one of their chosen lending institutions, but it’s usually not the best option because they’ll try to make a profit through the financing. They can add to what the finance company is offering 1-2%, or even up to a 4% higher rate. That extra interest you pay goes directly to them.  However, if you’re buying through a dealer OR private seller, you can pre-arrange with your bank or credit union or an online auto financing company to secure a credit line at a lower rate. This will help you because if they want to do the financing for your new/used car they will have an interest rate to beat and not just see how high you will pay.  Know that most lenders are not willing to give loans for cars older than 5 or 6 years, though. Shop around for the best rate, and secure your financing before you shop.

2) Determine how much you can afford to pay. Look at your budget and establish the amount you’re willing to spend, then use an online payment calculator to see how much car you can actually afford.

Consider all expenses other than your monthly car payment, like:

– sales tax (if buying from a private seller, you’ll have to pay tax upfront when you register your vehicle, not through financing)

– titling fees (if you are buying a new vehicle, the dealer usually takes care of the title transfer for you)

– vehicle inspections (safety and emissions)

– vehicle registration

– auto insurance (it may go up if you’re buying a newer vehicle)

-If you’re buying an older car or one that may need repairs soon, factor in maintenance expenses as well.

If you are purchasing a car and you have a credit score below 640, the finance company may charge the dealer an acquisition fee to take on the loan. This fee can range from a few dollars to thousands of dollars. This is supposed to be a business-to-business transaction meaning that by federal law the dealer cannot charge you the fee in the price of the car.  You shouldn’t have to pay more for the car and a higher interest rate just because you have a lower credit score. Look through the contract carefully make sure all the numbers add up – if not, question the dealer.

Consider that these extra fees, as a general rule, can tack on an additional 10% to the purchase price – meaning a $20,000 car will cost about $22,000, and you’ll be paying interest on that additional amount if you’re financing the purchase.

3) Bigger down payment = lower monthly payments, and lower in overall interest. The down payment is NOT part of your loan. A large down payment also shows as an act of good faith to lenders, which can result in a lower interest rate. Experts recommend a minimum of 20% down to minimize financial damage. Experiment with an online payment calculator to see how much money you can save in interest by making a bigger down payment, buying a less expensive car, making higher monthly payments, or changing the term length.

4) Longer term = lower monthly payments, but higher in overall interest. Terms are expressed in monthly, typically between 24 and 84 months. Go with the shortest loan term that you can manage financially to save the most interest. You pay the bulk of interest charges towards the beginning of the loan, so you can take out a longer-term loan and pay it off ahead of schedule – but check to see if your lender charges an early termination fee for doing so.

5) Make sure you’re getting a good deal. Check Kelley Blue Book (kbb.com), or closed eBay car auctions to see what the car model you’re considering is valued at to make sure the seller is asking a fair price. Also, apps like trueCar can help you see what other people in the area have paid recently. Expect sellers to ask more than the car is worth, because they usually allow room for negotiation.  This is why you have to do your research! Offer to pay only what market value says the car is worth – subtracting for high mileage and damage, and adding for after-market options. DO NOT sign anything until you’ve taken the car for a test drive!

6) Once you find the car you want, check its Vehicle History Report (VHR) to make sure you aren’t buying a lemon. A VHR will tell you the past owners of the car, its maintenance history, accident history, title history, if there are any liens on the car, or if it’s had flood damage.  Some companies will offer free car history reports or VIN checks, but the information on these is limited to recalls and customer complaints. To get a complete history of damage and to check if it’s been stolen, you’ll have to pay a company for that, such as Carfax. Check even if you’re buying from a big dealership. Lemon laws are written to protect new car buyers, and most states don’t have a lemon law for used cars.