Shopping for a car can be a blast, but it can also be very stressful. Car salesmen are notorious for pushing customers in the most profitable direction, whatever the damage. Most of us can't afford to put a sizeable down payment on a car, so we are forced to make due with a heavy car loan. If you're a first time buyer, a car loan can be daunting. Thousands of dollars of drivable debt will soon be in your name. There are ways to be safe and secure before you sign the dotted line, just make sure you do your research before you make a deal.
Weighing Your Lender Options
- Dealer loans: You can choose to go through your car dealer for a loan, but chances are your interest rate will be through the roof. Dealerships make the bulk of their money on auto loans, so they want to get you on the line for as much as they can. Never take the first deal they offer. Regardless of how much they insist it is the best they can do, they can undoubtedly go lower. If your credit isn't great, dealer loans might be your only option. Just keep your eyes out for any suspicious negotiations.
- Lender loans: If you walk into a dealership pre-approved for a loan, you already have a leg up on their finance department. You can utilize this pre-approval rate to your advantage, and leverage whatever deal they put on the table.
- Home equity: If you own a home, you can borrow against the price of it when you purchase a car. This is a good idea if you want to lower your interest rate. Your home will act as collateral for this new loan agreement. You also appear like a credible buyer to the dealership.
For the most part, your interest rate will depend on your credit score. If you find that you can't get a low enough interest rate with your current credit score, consider paying down some of your lines of credit and then reapplying. Having several loans in your name can also be detrimental to your interest rate, so be knowledgeable about your personal credit report.
- Zero-percent financing: Many new cars will promise zero-percent financing. Although it may appear attractive, there are often hidden fees tied to these deals. You could end up paying more than the actual retail price of the car.
- Variable-rate loans: Occasionally you can convince a lender to set up a variable-rate loan. These will adjust to the rise and fall of the current interest market, and can be much easier on your wallet.
Useful Terms to Keep in Mind
- Annual percentage rate (APR): APR is how much your car will cost you per year in accordance with the loan you take out.
- Blue book price: The Blue Book price of the vehicle is the current selling price at the time you buy. This will be different depending on make, model and current market rates, so you should make sure you check current rates.
- Interest rate: The interest rate you are charged for your car is the amount of additional money tacked on to the monthly rate. A good auto interest rate is under six percent.
- Manufacturer suggested retail price (MSRP): The MSRP is how much the dealer has bought the car for from the manufacturer.
- Amount financed: This is how much your car will cost once you factor in the amount you put down and the interest you will accrue.
Considering a Lease
In recent years, leases have grown more and more popular with car buyers. The monthly payments are always lower than when you purchase the car outright. Just like when you purchase your vehicle, make sure you do your research with leasing. It is possible to find a good deal with a lease, but you have to keep in mind that you aren't necessarily paying toward a purchase. With that in mind, people who lease vehicles must be much more careful than those who are paying to own. Lease-to-own options are sometimes available at certain dealerships, but you run the risk of drastically increasing your monthly payment at any point.
Before you do anything, research the car dealerships in your area. Visit sites that provide consumer reviews on the services provided. You can avoid any nasty encounters or pushy salesmen. Purchasing a car can be an extremely rewarding and exciting endeavor, but you don't want to sell yourself short. Like any big purchase, make sure you do your research before you sign any contracts. If you appear knowledgeable, you will walk away not only feeling confident but with a much better deal.