Getting a car loan to purchase a vehicle is a common practice for American consumers. In fact, using credit for a lot of purchases is a preferred payment method for a lot of buyers. Whether that is buying a home, a new TV, a kitchen equipment – we all love to use our plastic or go to the bank to get a loan.
But while the practice may be common, that does not mean you should automatically assume that this will be your mode of payment. It is important for you to consider all your options first before you actually proceed to apply for a loan.
Smart spending is not really about using cash alone. You can still use credit but you have to do so properly. Make sure that you understand the pros and cons before you finalize your decision to use a loan to make a purchase – especially if it is for a car.
In truth, there are purchases that are loan worthy. For instance, a home is an expensive expense that nobody really expects you to pay it in cash. However, there are purchases like buying a car that you need to think twice before you take out a loan to buy it. That is because a car, once you drive off from the dealership, starts to depreciate on you. No matter how short the term of your car loan is, you will always end up paying more than the actual value of the vehicle.
How to maximize your auto loan
But if a car is needed and there is no way for you to save up for it to buy one in cash, you may want to consider these important tips when you are getting an auto loan.
- Set a budget. As soon as you decide to buy a car, whether you intend to use cash or credit, you have to set a budget first. That way, you can limit your search options. You can do this by considering your other expenses and debts. Make sure that you do not only consider the monthly loan payments – you should also consider the other costs involved in car ownership.
- Get as much cash as you can. Even if you cannot pay 100% in cash, save up at least for a downpayment. That way, you can minimize the loss in value that is usually present when you buy a vehicle through a car loan. Even 25% can make a big difference in your budget.
- Take a look at your credit score. Before you apply for a loan, make sure you check your credit score first. Do you need to improve your credit score or is it in fairly good condition? If it is the former, then you may want to consider working on your score first. That way, you will not be charged with high interest rate on your loan – which is very common for borrowers with a bad credit. In case there are errors in your credit report that is causing your score to be lower, you need to correct that so you can get the lowest interest on your car loan.
- Understand the APR of loans. The APR is the annual percentage rate. When you are borrowing money from any financial institution, the loans rates usually reflect the APR. This is a combination of the interest and fees involved in the loan. The rule is, the lower the APR, the more you will save money.
- Know your loan term options. When you have a long term loan, that means you will be paying less each month because your debt will be divided into more payments. However, you will be paying more on interest amount. But if you get a short term loan, you will pay more each month but you will end up saving more because you pay less interest. According to Reuters.com, regulators are quite concerned because financial institutions, banks in particular, offer long term loans to borrowers with bad credit. That means they pay much more than the actual value of the car. It ends up compromising the finances of the consumer all the more.
- Compare the loan rates and terms of different lenders. There are many websites that has a list of rates and terms from various lenders. You may want to look at them so you can check which of them will give you the most savings. You can also look for online calculators that will help you determine the monthly payments that you are expected to make on the car loan each month.
- Get to know your lenders. There are different ways for you to get your car financing. Aside from banks, you can also borrow money from credit unions. The car dealership also has their own financing terms that they can offer you. Make sure you consider the loans being offered by each. Most of them have their own discounting schemes and you should consider each carefully. Generally, credit unions have the best rates but it is up to you which you will use.
- Detail all your payments. Remember that your loan is not the only thing that you have to pay off. Do not forget the interest rate too. Factor that in your payments.
It is also a good idea if you can trade in your old car and include it in the deal. It will help lower the car loan that you have to borrow. But make sure that you ask the dealer to detail all the prices. For instance, get the price of the car you will buy, the trade in value of the current car, and the financing terms of the dealer. That way, you will know just how much you are really paying for.
Know the car costs on top of your loan
We have mentioned earlier that you have other costs to worry about apart from the monthly payments on your auto loan. These include your car repairs, maintenance, gas and car insurance. There are other payments too but these are the general costs of car ownership.
According to an article on CBSNews.com, these are the estimated costs of owning a car.
- Small sedan – The cost of gas and basic maintenance per mile is 16.3 cents. The annual cost of driving 15,000 miles a year is $6,957.
- Medium sedan – The cost of gas and basic maintenance per mile is 19.1 cents. The annual cost of driving 15,000 miles a year is $8,839.
- Large sedan – The cost of gas and basic maintenance per mile is 21.7 cents. The annual cost of driving 15,000 miles a year is $10,831.
- SUV – The cost of gas and basic maintenance per mile is 23.8 cents. The annual cost of driving 15,000 miles a year is $11,039.
- Minivan – The cost of gas and basic maintenance per mile is 21.4 cents. The annual cost of driving 15,000 miles a year is $9,753.
According to the article, this is lower than the estimated cost of car ownership in 2013. These data comes from the AAA. If you wish to learn how to compute the actual cost, then you may want to view the report from AAA.biz. It has instructions on how you can calculate the amount of money that you need to spend on the car that you are eyeing to buy. This will give you a good idea on how you can budget your money. It will also help you decide on the amount of money that you should get on your car loan.