Smart Borrowing: Tips for Choosing an Auto Loan You Can Afford
A new car can be exciting, but the excitement wears off fast when buyers realize they’re paying more than they expected – and can afford. It’s crucial to look at the financing options carefully and make smart decisions to avoid ending up in a loan that’s too expensive or that will take too long to repay. Below are some tips to help choose the right auto loan to ensure it is affordable.
Figure Out the Budget First
It’s crucial to consider the budget first, before looking at cars or talking to the dealership. It may be a good idea to check out an auto loan calculator to see what the monthly payments would be with a higher or lower down payment, a more expensive or less expensive car, and shorter or longer term lengths. This can make it easy to see what the payments might be like and what can cause them to change significantly.
Consider a Larger Down Payment
Larger down payments mean less money borrowed to pay for the vehicle. On top of helping to reduce the amount financed, this reduces the amount paid in interest over the life of the loan, so buyers save more money in the long run. It also helps to reduce the number of payments or the amount paid per month, making the vehicle far more affordable.
Avoid Add-Ons From the Seller
Dealerships may offer a number of add-ons that increase the value of the vehicle or add other benefits. These can include extended warranties, gap insurance, or service packages. It’s best to avoid these add-ons if possible. If they are needed or desired, it’s better to pay for them outside of the loan to prevent having to pay interest on them over the life of the auto loan. They’ll likely be cheaper, too, if the buyer has time to shop around for a better deal.
Read Loan Terms Carefully
Buyers often skim the loan terms before signing, and this is never a good idea. It’s crucial to make sure the loan has a fixed interest rate, since variable interest rates can increase the monthly payments when they change. It’s also a good idea to make sure there are no prepayment penalties, since paying a little extra when possible can take time off the length of the loan. This can lead to significant savings on interest.
Be Aware of Potential Issues
There are dealer tricks that auto buyers will want to watch out for when they go to finance a new vehicle. It’s crucial to find a lender the buyer can trust to avoid these potential issues. A common one, which typically happens more to those who have a poor credit score and may not qualify for a loan easily, will involve letting the buyer take the vehicle home before the loan is approved. The buyer then receives a call saying the rate changed, and the vehicle now costs more.
Selecting the perfect car to buy is just the first step in the buying process. When it’s time to consider an auto loan, it is important to choose carefully to avoid hidden fees or high interest rates that make the monthly payments unaffordable. Use the tips here to find the right auto loan easily and ensure your next car purchase is more affordable and fits your budget.
