When you finance a car, you’re going to be paying a lot more than it is worth because of the interest on the loan. It’s a necessary evil that needs to be dealt with. But because you shouldn’t be giving away too much of your hard-earned money, you need to approach a car loan with caution. Here’s what you should do.
Understand your credit score before you head into a dealership. Even people with poor credit can get a car loan easily because cars are easy to repossess. Use free tools online to know your score. If it’s good, then you can negotiate a good deal. If not, work on improving your score. If you can’t wait, then you should know that for people with scores under 700, the interest rates rise quickly.
If you have excellent credit, you’ll get competitive rates everywhere. If you don’t, then make sure you shop around with banks, credit unions, and online lenders for a fair rate. If you’re made an offer, you can use that offer to try and get others to beat it. Consider trying loan matching services online. Also, use any offers to negotiate with the dealer for a better offer.
Short Loan Term
If you can afford it, don’t be afraid of high monthly payments that come with shorter loan terms. That’s because you’ll be getting a low-interest rate with a shorter term. When the salesperson tempts you with lower and lower monthly payments, they’re extending the term of the loan while increasing the interest too. So you’ll end up paying too much for the car.
Save up until you can put down at least 20% of the car’s price upfront. Dealers will try and convince people with good credit to put down small or no payments. But that’s very risky. Make a large down payment, so you can borrow less, pay less interest, and get debt-free quickly.
Remember to pay for all taxes, fees, and any extras with cash. Don’t roll any of these miscellaneous expenses into the loan. Paying interest for taxes is simply ridiculous. There’s no need to make the car more expensive.