Cars depreciate. They start losing their value the moment you buy them. That’s why paying interest on them hurts. But most people don’t have the cash lying around needed to buy a car and need to finance it. And there are many ways you can go wrong while financing your car. Here’s how to get a car loan the right way.
Understand Your Credit Situation
Check your credit report and score before applying for a car loan. You’re likely to get a car loan even if you have poor credit because a car is easy to repossess. But you’re going to be paying a lot more money than the car is worth if you get a high-interest loan. So, either work on improving your credit score or ensure that there are no mistakes in it.
Get Financing Quotes
If you have excellent credit, you’re likely to get the best financing rates everywhere. But if you don’t, check with online lenders. Fill out an application and see the interest rate they offer along with the maximum amount you can spend. You could use this to negotiate a better deal at the dealership too. Banks or credit unions can also offer competitive rates.
Keep the Term Short
Shorter term loans have higher monthly payments but low interest rates. That’s the ideal situation. Don’t let the dealer sway you with low monthly payments that stretch out over five years or more. The ideal term is between 36 to 48 months. The longer your term, the more interest you pay, and the more risk you run of owing more money than your car is worth at the end of the term.
Put Down 20%
Save up at least 20% of the price of the car to put as down payment. It’s tempting to finance the whole thing, but you’ll get better loan terms with a large down payment. You’ll also get debt-free sooner.
Pay Cash for Certain Things
Never roll the taxes, fees, and any extras into the loan. Always pay for those things in cash. Think about it. Why would you want to pay interest on taxes and fees? There’s no need for you to borrow more to pay for those items.