What many people wonder when looking for a new car is how to pay for it. When it comes to purchasing a car, there are two options: cash and auto loans. For many, paying with cash upfront isn’t an option. Cars are expensive, especially if buying new, so writing a check for $25,000 is impossible. This is where auto loans come in. Auto loans are a great way to finance a car and drive in something you love. However, there are a few things to be cautious about before taking out an auto loan, so you don’t end up in more debt than you need to be.
Consider the Length of the Loan
If you take out a car loan, you’re technically in debt because you haven’t paid for the full cost of the car. Don’t let this scare you, however. Loans can help boost your credit score if you pay on time and will also allow you to make purchases on nice items, such as a new car, without paying in full, upfront. But, when it comes to taking out a loan, it’s important to consider the length of the loan.
Many car dealers will talk to you about the price of the car in terms of monthly payments, instead of the actual sticker price. They’ll do this by considering the longest auto loan, which is typically 72 months (6 years). Keep in mind, the longer the loan, the cheaper the monthly payment, making the cost seem cheaper than it actually is. However, this means you’ll be paying more interest, which can make the total cost of the car more expensive than you anticipated. So, find an auto dealership that offers a variety of loan payment plans that work for you.
Know Your Credit Score
While a loan can help your credit score, you’re going to need a good credit score to get approved (kind of like a Catch-22). If you have a poor credit score, you may not get approved for a car loan, or you may have to shop at a bad-credit-accepted car dealership. Additionally, your credit score will also determine the rates and fees of your auto loan.
Luckily, many dealerships are offering low car rates because your car is looked at as collateral. Unlike credit cards where you can either pay back or not pay back the amount of money you borrowed, a car dealership can take your car if you fail to make recurring payments. Because a bank knows they can repossess your car, they’re more willing to give you a loan.
Create a Budget
It’s not advised to just go to a dealership and buy a new car without a financial plan. Creating a budget will allow you to find a car in your price range that meets all of your specific needs. It’s best to not spend more than fifteen to twenty percent of your take-home pay on the total cost of the car, so you don’t end up struggling to pay other bills, pay for food, and other necessities. To help, download a budgeting app or speak with a financial advisor to determine the best way to buy a car on a budget.
Get a Pre Approved Loan
Every dealer’s goal is to meet their monthly quota and sell as many cars as they can. This means they’ll do whatever it takes to put you behind the wheel of a new car. So, expect a dealer to tire you out by throwing a bunch of numbers at you to either confuse you or convince you to buy a car. As the buyer, however, you hold all the power. This is why it’s important to hone in on your negotiating skills and know what you want and don’t want in a car.
Dealers are going to try to sell you a financing plan with high interest and fees to get the most money as well. But, if you come in with a pre approved auto loan from an outside bank or lender, you may be able to negotiate a lower financing plan.
Buying a car is like buying a house. It’s expensive and you’re going to spend a lot of time in it. You don’t want to sit behind the wheel regretting your purchase while sitting on a pile of debt. Finding the best auto loan that matches your financial needs will ensure you drive happily ever after.