There are some things to consider before you sign the dotted line on that auto loan and are legally bound to adhere to the terms to which you have agreed. According to the Consumer Financial Protection Bureau, 42 percent of new auto loans in 2017 carried a loan term of at least six years – some seven or eight years or more. No one wants to own a loan longer than they do a vehicle. Here are seven things you should consider before you finance a car.
Is your loan term longer because you want a fancier car?
Choose a car with a price tag that is reasonable for your budget. A vehicle that you can pay off in 5 years with a lower payment is a smarter choice than a car with a higher price tag that will take you six or seven years to pay off. Think about your wants, but more importantly, understand your needs before you head to the car lot.
How much money do you have to put down on the car?
If you have a modest amount of money saved to put down on your car, that’s great. Make sure not to overspend when you select a new vehicle. Remember that you can junk your car and make cash for it or trade it in when you purchase your new car. Do your research so you have an idea of what your old car is worth before you head to the car lot. Also, remember you can negotiate; you don’t have to agree to the first price that is offered.
Do you need to purchase a car right now?
Every decision you make about spending your hard-earned money is a big one, and one that should be pondered over and not rushed. If the car you’re currently driving is still working well, it may be the best idea to wait to buy a new one. However, if your car is at a point that the impeding repairs may become pricey, it could be the ideal time to get a newer car and say goodbye to your old one. Go ahead and add up the anticipated expenses and repairs for your current car and compare that amount to the total cost of purchasing a new vehicle. These numbers should give you some clarity.
How are the interest rates?
Vehicle loan interest rates vary; compare lenders before you settle on a loan offer. Another thing to keep in mind: loan rates tend to be higher on longer loans. This is another reason it’s good to choose a shorter car loan.
Should you use direct or indirect lenders?
You can opt to get your loan from a financial institution, or through the car dealership. While it may feel convenient to have the dealer set up your vehicle financing, sometimes they receive mark-ups on the interest rate or financial incentives that often increase the cost of the car loan. Do not agree to dealer financing terms unless you’ve taken the time to obtain independent loan offers you can compare with them.
Do early payment fees apply?
Pay attention to any early payment fees you will incur if the loan is payoff earlier than the predetermined pay off time. These fees can affect you in a plethora of ways. If you decide to trade in the car for a different one, you’ll be forced to pay off the loan earlier than anticipated, adding to the cost of the trade-in if you’re charged early payment fees.
Is there a cost associated with deferred payments?
A pitch like, “Make no payments for six months!” sounds good, but that doesn’t mean you can use your car for free for those six months. There’s a good chance that the loan terms state that you’re accruing interest during that time frame. You won’t be paying down principal initially, so you’ll see those extra six months of interest payments on the full loan balance.
The process of buying and financing a new vehicle can be a daunting, complicated, and expensive process. Consider these points before you jump into buying a new car so you make a smart decision and get a new car you love.
Katie Parsons is a writer for Junk Car Medics and the creator of the parenting blog Mumbling Mommy. She lives and works on Florida’s Space Coast.