With the average age of the U.S. car and truck fleet near record highs and the cost of borrowing money near historic lows, many of us are thinking more seriously about updating our rides. While it would be great to be able to simply pay cash for any new -- or used -- vehicle, few buyers are actually in a position to do so.
That leaves financing as the most feasible alternative route. Although coping with that challenge may appear daunting at first glance, understanding the basics and knowing how to deal with key factors that have the greatest impact can make the task much easier, regardless of the vehicle you're hoping to purchase or your intended source of funding. To help prevent any unpleasant and potentially costly surprises in either area, we offer five simple but effective steps to help you prepare to take on this critical decision process. And if this is your first time buying a car, check out our collection of 10 Tips for First-Time Car Buyers.
1. Know your credit rating
Before doing anything else, find out your current credit rating scores. Those critical index numbers are used to determine the finance rate that you'll be offered, and it's to your advantage to go into any situation knowing exactly where you stand, regardless of whether you plan to seek funding through the dealer or your local bank. By law, individuals are entitled to one free credit report every 12 months from each of the three major nationwide consumer reporting companies. Complete details on how to obtain these reports are available at www.annualcreditreport.com. If you do find that any contain erroneous and potentially damaging information, immediately contact the issuing agency and resolve the matter.
2. Determine how much vehicle you can really afford
Whether you're thinking new or used, a big part of having any deal make financial sense is to be honest about the level of dollar commitment you can reasonably take on. That assessment needs to factor in both the size of the initial down payment as well as the individual monthly payments in addition to all other elements that are included in your overall household budget.
3. Decide on the length of your loan period
In today's economy, the average length of an auto loan is generally five to six years; however, longer financing periods have become more common. While extending the length of a loan permits lower monthly outlays, your total financing costs over time will be greater. Today, many manufacturers offer qualified buyers special low-cost or zero-interest loans, although most of those are usually for shorter -- frequently 36-month -- time periods. While individual payments on these loans are generally higher, the actual out-of-pocket cost over time will end up being less.
4. Consider all costs involved in the purchase
Before you commit to buying any given vehicle, be sure to explore all of the related costs that will impact the total dollar outlay required. Factors like insurance coverage, scheduled maintenance, repair costs, annual licensing fees and projected fuel costs can have a significant bearing on the outcome of your decision-making process. Check out our 5-Year Cost to Own figures to get a better idea of how much that new car will really cost you.
5. Shop wisely for the best source of funding
A little bit of legwork out front can pay handsome dividends in the long run and put you in a far stronger overall position when it comes to negotiating the price of the vehicle itself. Check with multiple dealerships and banks in your area to ascertain what their rates are on various auto loans. And be aware of any manufacturer-specific subsidized promotional rates that also might be in effect during a given time period. The bottom line: Heading into the showroom with your financing already in place can greatly simplify the overall purchase process.
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