Top 5 Facts: Car Financing
Planning to finance your next new or used car purchase? Tread wisely because a misstep could cost you hundreds or even thousands of dollars. Don’t let the shiny paint and glittering chrome obscure your financial vision. Consider these five points.
1) You're Shopping for Two Things: A Car and Financing
It's easy to focus only on the car you want to buy, but in reality, you're shopping for both a vehicle and the financing to pay for it. Mix the two and you're apt to overpay. Auto loans can be sourced through dealerships, as well as from banks, credit unions, and finance companies, such as LightStream.com.
The best practice is to shop around and get pre-approved for a loan before setting foot in a dealership, so you can gauge all financing offers.
2) Shorter Terms, Big Benefits
It may sound tempting to choose a loan offering a low-low monthly payment and spread it over a long term, say six or seven years, but it's far from cost-effective. Due to interest over time, those who agree to longer loan terms could pay thousands more for the same loan amount than those with short-term loans. In general, shorter-term financing offers lower interest rates as well.
Experts advise financing for the shortest term you can afford. Think four or five years rather than six or seven.
3) Good Credit is Rewarded
Your credit score provides insight into your credit history and indicates the level of lending risk financial institutions can expect when lending you money. If your credit score is low (indicating you’re deemed a higher risk), you'll pay higher interest rates and may need a larger down payment to ease the lender’s mind. If your score is high, you'll have access to the best financing options around, potentially even perks like zero-percent financing through the manufacturer.
It's best to check your credit score long before you apply for financing, so you’ll have ample time to rebuild your score or correct any mistakes found on your credit report.
4) Down Payments Drive Savings
When financing a car, a large down payment can initially sting, but it’s a benefit over the long haul. Cars depreciate and before you know it, you may owe more on a vehicle than it’s worth, known as “negative equity,” a side effect of long terms and small down payments. The more you put down, the quicker you’ll reach positive equity, and the lower your monthly payments will be.
Trading in a vehicle helps further reduce payments. Just make sure to negotiate your trade separately from the purchase price and financing package.
5) Great Math Beats a “Good Deal”
Automakers offer plenty of attractive incentives to sweeten today’s car deals, including cash rebates and zero-percent financing. But how do you know which deal is sweetest? Don’t guess; do the math.
For instance, compare two 36 month/$20,000 loans. One features zero-percent financing, while the other a rate of 6 percent and a cash rebate of $2000. Zero-percent financing may sound like the clear winner, but the cash rebate is actually the better deal, all other factors equal. In other instances, though, a zero-percent rate financing deal might be better. Which is why you should do the math.