February 27, 2018
When you’re shopping for a new car, there’s one part of the process that’s probably the least fun to think about, but the most important for your financial health, and that’s the terms of the auto loan you’ll be taking out to pay for it. Unless you’ve got enough money saved up to pay cash for the car on the spot, you’re going to need some kind of financing arrangement. Many people just take whatever the dealership offers them and never give it much thought, but the terms of the loan you take out can make a huge difference in what you ultimately end up paying for the car, and the impact on your finances over the long term can be significant. Before you get ready to drive off the lot in a new car, take some time to learn about how to get an auto loan with favorable terms for yourself.
One of the most common ways to end up with a less than optimal loan is to take whatever the dealership offers you. A much better plan of action is to seek out reputable local or online banks, credit unions, and other lenders and try to get pre-approved for the best loan terms you can find.
The dealership has you over a barrel when you’ve already decided you want to buy a car from them and you need them to give you financing, but lenders competing for your business have every reason to offer you attractive loan terms that will save you money over the long haul.
Mind the Total Cost
Don’t get hung up on the amount of the monthly payments. That matters for your budgeting purposes, but it doesn’t tell you much about the overall value of the loan. A loan that’s stretched out over a longer period of time will have lower installments, but you can easily end up paying much more in total because of the interest charges.
Avoid Credit Score Surprises
Before you start applying for a major loan (like auto financing), get a copy of your credit report. Your credit card company might be able to provide this for you, or you can request information from the major reporting agencies. If your credit score is poor, you might have a hard time getting approved for a good loan, and you’ll want to find out what you can do to improve it.
Sometimes a bad credit score is caused by fraud or errors, and you’ll want the opportunity to get such issues corrected.
Applying for multiple loans can also affect your credit score, so that’s something to keep in mind when shopping for an auto loan.
Know What You’re Signing
Finally, make sure you read your loan contract carefully. There can be unpleasant surprises like variable interest rates, early payoff penalties, arbitration agreements, and other things you might not necessarily want. Read the loan paperwork and be certain you understand all of the terms of the arrangement you’re entering into.