Car Loan Guide:
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1.
Financing Your Car: Auto Loans
Shop around for auto loan interest rates. Most
banks and credit unions will knock off at least a quarter of a percent
for their auto loan customers. Have these quotes handy when you talk
auto loan financing with an auto dealer. The higher the down payment,
the less you'll have to finance. This not only reduces your overall
auto loan rates, but often qualifies you for a lower interest rate.
Down payments are typically 10-20% of the final price. Avoid long car
loans. The monthly payments are lower, but you'll pay far more in
overall interest. For example, a two year, $15,000 loan at 9% will
cost you $1,446.51 in interest; the same amount at five years will
cost you $3,682.52- over twice as much! This figure is easy to come to
with an auto loan calculator. If you take out an auto loan, put as
large down payment on the vehicle as you can manage. And pay as much
as you can possibly budget to keep the length of the auto loan to a
minimum. If you can't put at least 20% down and finance the vehicle
for four years or less, then you should buy a less expensive car. In
the past, 24-month or 36-month car loans were normal. But today, 60-
and even 72-month loans are common. With the longer car loans,
however, it takes longer to reach a positive equity position in a new
car or even a used car, and owe less on it than it's worth. As soon as
you drive a new car off an auto dealer's lot, the car decreases in
value due to depreciation. But with a shorter length auto loan, after
a year of making payments, your car's value will be worth more than
you owe on it. Be aware that there are several ways to lower monthly
payments, but only a lower interest rate or a lower auto loan rate
will lower your total interest expense. Always use an auto loan
calculator! READ EVERYTHING YOU ARE ASKED TO SIGN AND ASK QUESTIONS
ABOUT EVERYTHING YOU DON'T FULLY UNDERSTAND!
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2.
An Alternative: Leasing a Car
Thirty percent of the people who got new cars last year decided to
lease instead of buy. The good news: Lease payments are lower than
auto loan payments, so you can drive a car for less. The bad news:
Consumers are suffering from sticker shock as the average car price
rose to $21,000 in 1996 from $18,000 in 1994, just two years before.
When judging a lease, shoppers usually look only at the monthly
payment. That works if you're sure you will keep the lease for its
full term and if, at the end of the lease, you will turn in the car
and lease a new one. Given two comparable leases for the same car, the
one with the lower monthly cost is best. However, if you plan to buy
the car when the lease is up or if you're forced to break the lease
early, that strategy may not work. To minimize your costs in case you
have to break your lease early, you want a low monthly payment and a
low cap cost. If you intend to buy the car at the end of the lease,
add up all the monthly payments plus the end-of-lease purchase price.
This is known as an open end lease and is not recommended. The car
with the lower total cost is the better deal. Remember: It pays to
comparison shop!
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3.
Buying Used Cars:
When buying a used car, start off knowing what you can afford. A
good rule of thumb: Your monthly finance payment on a used car should
be approximately fifteen percent of your monthly income. Evaluate your
finances to know what you can afford as a down payment as well as what
you can afford to pay per month. Keep this information to yourself, do
not share this with the dealer. Research the cars that fit into your
range, and narrow down your selection. The auto classifieds will help
you. Read up on auto leasing vs. buying, and decide which would be
better for you. If you decide to lease from an auto dealer, become
familiar with the terminology associated with auto leasing. If you
decide to buy, get pre-approved financing rates from your bank or
credit union. This information will help you negotiate. Find out
everything there is to know about the car or cars you have in mind.
This includes knowing the trade-in market value for each car including
options, mileage adjustment and condition of the car. Start shopping
via the Internet, auto classifieds, auto auctions and/or auto
dealership lots. Decide which venue will be your best source for the
used car you want. You will definitely want to test drive any cars of
consideration to get a good feel for the automobiles. Negotiate for
the best price. If you are going to trade in your old car, know what
it is worth before asking for an estimate. Be aware of the
salesperson's strategies before faced with them for the first time.
When finalizing a purchase, READ EVERYTHING BEFORE SIGNING! Decide in
advance if you need a warrant, and don't let any "dealer
extras" or ancillary charges slip by.
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out an application for a car loan NOW!
4.
GAP Insurance:
GAP insurance covers the difference between what you owe on a car
and its actual value, should the car be "totaled" or stolen.
If you finance or lease through a dealer, he or she will likely
suggest you purchase GAP insurance, which can cost up to $500. If you
think this situation is likely, then your auto financing plan is
probably too long. Whether you need GAP or not, be wary of how dealers
try to sell GAP. Dealers may insist the only way to give you financing
is if you purchase GAP insurance-this is untrue. When negotiating car
finance terms, be sure to ask if GAP insurance has been added to the
cost, as the dealer may not tell you.
5.
Credit Unions vs. Banks:
Credit unions generally charge fewer and lower fees and offer
better rates than banks. In addition, credit unions offer auto loan
calculators and counseling services where consumers can find pricing
information on cars to or compare monthly payments for financing. You
can join a credit union either through your employer, an organization
or club, or if you have a relative who is part of a credit union.
6.
Checking Your Credit Report:
Your ability to get an auto loan rests largely on a network of
credit reporting agencies that either share information with, or are
owned by three major credit bureaus. If buying a new car, it's a good
idea to check your credit report to know where you stand-and make sure
it is correct. If you've made mistakes in paying previous loans,
bounced checks, made late payments or had other problems, you may be
able to correct them- or at least reduce the amount the damage they
will do to your credit. For an auto loan, check your credit (and
arrange financing with your bank or credit union). For credit cards,
check your report before you apply. You do not want a credit report
problem to slow down your application. Did you know that applying for
loans you can't qualify for could put more bad marks on your credit.
If too many potential lenders have checked your credit, others will
wonder why you're suddenly trying to increase your level of debt with
every finance company in town. To make certain your credit reports are
accurate, its a good idea to check with three major national credit
bureaus: Equifax, Experience, and Trans Union. Under the Fair Credit
Reporting Act, you may not be charged for a copy of your credit report
if you request it in writing within 30 days after being rejected for a
loan. To obtain a copy of your report:
-
Call
the number of the proper credit bureau and follow directions.
-
Make
certain you request the copy in writing, and send it certified
mail, return receipt.
-
Include
your full name, date of birth, current and former address, Social
Security number, your spouse's name, and your phone number.
-
Each
person requesting the report should sign the request.
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7.
What if You Don't Qualify?:
Why do some
lenders say "no" when others say "yes"? All
lenders make a judgment about character (your willingness to repay),
capacity (your ability to pay) and collateral (the value of what you
are buying) when deciding to grant you a loan. There are several tools
that aid lenders in making this judgment, including automated credit,
or risk scores. In some cases, these scores replace human decision
making. As a result, separate lenders can look at the same loan and
view the same credit risk differently. If your loan application met
with "no" at one lender, there may be another lender out
there whose credit risk criteria is different. If so, they may have a
loan for you.
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8.
What Less-Than-Perfect-Credit Means:
The first step to understand if you are considered a credit risk. Most
lenders will consider you a higher credit risk only if your credit
report states that you have more late and slow payments that stated in
these categories:
-
Revolving
Credit (credit cards): No payments 60 days or more past due and no
more than two payments 30 days past due.
-
Installment
Credit (car loans): No payments 60 days or more past due and no
more than one payment 30 days past due.
-
Housing
Debt (mortgages and rent): No payment past due date. This can be
proven by providing the borrower's canceled checks for the past 12
months or a loan payment history for the mortgage provider.
Contrary to popular belief, good credit does not always mean
perfect credit. If your credit reports show any 60 to 90 day late
payments, you may need to seek out a lender that specializes in
less than perfect credit.
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