Financing is the most common option for car buyers, followed by leasing and a straight-up cash deal. But as simple as vehicle financing sounds – mainly paying a monthly payment plus interest for X period of time – there is more to this long-term contract that you need to understand before making any final decisions. Here are five tips on how to evaluate financing the right way.
Get Pre-Approved for a Loan
Before visiting your local auto dealer, you’ll want to have a pre-approved loan from a bank or private lender of your choice. While auto dealers are happy to connect you with their lender, you may get a lower interest rate and more flexible repayment terms by doing your own comparison shopping for auto loans. Getting pre-approved before you visit a dealership shines light on one critical question – how much money can you afford for a new car? Not knowing the answer to this question leaves you vulnerable to making financially irresponsible decisions once you’re at the dealer’s showroom.
Work on Your Credit Score
Another great reason to get pre-approved for a car loan is that it lets you know where you stand, credit-wise. Your credit score predominantly dictates the interest rate offered by your prospective lender/s. Consider fixing your credit score and bumping it up a few points, and then apply again for another car loan. Even a 1-2% drop in interest rate can translate into over $1,000 in savings over time.
Put More Money Down
The more money you put as down payment, the lower your interest rates are. You also avoid the depressing scenario wherein you owe more money than the vehicle’s market value. Unfortunately, since most dealerships don’t even require you to make any down payment to drive your new car home, most buyers end up exercising the option and taking on the subsequent higher monthly payments. There is no specific number as to how much you should put down, but 20% or more is often recommended by financial experts.
Pay for Miscellaneous Expenses With Cash
Aside from the car’s sale price, you have other costs to worry about, namely taxes, fees, and extras, i.e. extended warranty coverage and cosmetic accessories. Choosing to finance these expenses has no benefit whatsoever and only increases your monthly loan payments. Pay them off with cash to save more.
Consider Gap Insurance
Gap insurance, short for guaranteed auto protection insurance, is another extra upsold by car dealerships and financial institutions. The policy is designed to cover the difference between what the insurer thinks your car is valued at and what you owe on your auto loan in the event that you total your car.
Vehicle financing is a great way to buy a new or used car without tying a large chunk of your savings or capital into the purchase. Be as pragmatic as possible by following the tips mentioned above.