Paying cash to buy a car would be great. But, unfortunately, we all can’t afford to go that way. What most of us can afford, is a loan. The important thing is to borrow in the right manner so you can save hundreds or thousands of dollars. Here’s how you can do that.
Save to put at least 20% of the price as down payment. Keep the loan term as short as possible to avoid paying too much interest. Negotiate to keep your annual percentage rate (APR) as low as possible. Put it together in a way that your monthly payments, including fuel, insurance, and maintenance, don’t cross 20% of your take-home pay.
Check your credit report. Your credit history and score will impact the kind of loan terms you’re offered. If you have good credit, you’ll get a lower interest rate, which means you’ll pay less for the car. Request your free annual credit report from all three three credit bureaus and examine it carefully.
Auto dealerships are convenient but the most expensive lenders. Shop around with banks, online lenders, and credit unions to see if you can get preapproved. Apply for preapproval within the same two-week window to minimize the impact on your credit score. Once you have a good offer, use it to see if the dealer can beat it and offer you better terms.
Salespeople are skilled at taking your money. Don’t let them misdirect you with discussions about monthly payments. Only negotiate on the final price of the car so that they can’t push you into buying something more expensive. They may also suggest a low or no down payment because they want you to borrow more and extend your loan term over five years. Don’t fall for it. Keep the term under 48 months. And don’t let them talk you into unnecessary features.
Ideally, buy your insurance separately. See what the lender requires you to buy, shop for quotes, and find a stable insurance company that offers a good rate.
Check your loan terms carefully. Ensure that there’s no prepayment penalty. In case you can pay off your loan early, you should be able to.