Apply the info provided in this trio of top questions and answers that people are asking about new car loans and you should be well on your way to that new car smell – and the fun thrill of the new auto ownership experience.
1.Where can I get the best deal on a new car loan?
The answer to this question will depend somewhat on your own unique financial situation, because there are a variety of lenders who make new car loans but many of them cater to a particular type of borrower. If you have excellent credit, for example, you will probably qualify for preferential rates and you can most likely walk into any bank and snag a really reasonably priced and manageable new car loan.
That’s because lenders are suffering from the mistakes they made within the past few years when they lost zillions of dollars by making bad loans and even worse Wall Street investments in high-risk mortgage backed securities and other pie in the sky ventures. If you are a responsible borrower with a great credit history, a low ratio of debt to income, and you have a steady job in this unsteady economy – then bankers want to court you and win your business.
If you have terrible credit and have recently gone through a financial crisis like a bankruptcy or foreclosure, on the other hand, those same bankers will probably turn down your loan application. You may need to go to a specialty lender who primarily does business with so-called “bad credit” consumers. You’ll pay more for your new car loan – mainly in the form of much higher interest on the loan – but when you need to borrow money and don’t look so good on paper that can be the best option.
Those who are somewhere in between can find their new car loans at banks and other lenders, but the terms and conditions of the loan will depend on your FICO score, income, credit history, and the policy of the particular lender. You can also turn to the dealership where you are buying the new car for financing, although that is generally the most expensive way to buy a new car.
2.When should I start looking for my new car loan?
Most buyers look for their new car loan at the last minute, once they’ve already picked out – and fallen head over heels in love with – their new vehicle. But unfortunately many of them get a huge jolt of disappointment when the lender breaks the news to them that they have to break off the love affair with that particular dream car and go shop for something a little less sexy, a little more boring and generic, but a lot more affordable. To avoid this kind of misstep, savvy shoppers should start to look for their new car loan as soon as possible.
Those who give themselves as much as 3-4 months will be in the most advantageous position, because that will give them enough time to review their credit report, make some changes in their finances, and prepare for a successful and swift loan approval process. Even if you don’t have that much time you can still visit lenders and find out what they expect from you, what kind of criteria you will need to meet in order to get your new car loan, and how much you can expect to borrow. That way you can shop with a realistic sales price in mind and buy a car you’ll love without having to worry about the downside if your loan does not go through.
3.What is the biggest pitfall with new car loans?
The biggest pitfall to avoid is borrowing more than you can handle, even if a lender or dealership offers it to you. Consult a financial planner, accountant, or friend who is educated about personal finance and determine how much car you can really and truly afford. Then stay within that budget so that buying your new car becomes an experience of freedom and pleasure, not stress and turmoil because suddenly all of your focus is on money problems. Debt that is reasonable can be a great asset and tool, but tip the scale too far and it can become a catastrophe. Shoot for a total auto expense – including car loan payments, insurance, gasoline, and upkeep – that does not exceed 10 percent of your total income. Try for 6-8 percent, but if you find yourself spending 10 percent or more it is a warning sign.
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To help you along the path of learning how to shop more skillfully and successfully for an auto loan, here is an overview of the top three things consumers generally ask about auto loans – along with some expert answers.
1.Where Can I Get a Good Car Loan?
There are lots of ways to get a car loan, and there are even auto loans for people with lousy credit. Car loans are available from banks, and these are best for people who have good credit. Sometimes credit unions offer similar auto loans at even better prices than banks do, so if you belong to a credit union keep that option in mind as well.
Meanwhile if you have bad credit it is possible to go a so-called “bad credit lender.” These companies specialize in lending to people who have had a recent bankruptcy or other credit crisis, but they typically charge higher rates of interest so it may be better to wait until you have a chance to rebuild your credit before taking out one of these more costly auto loans. Of course you can also apply for credit at the dealer who is selling you the car. Although this usually means you wind up paying more over the long term, it can be a quick and easy solution for a car buyer who has not been able to secure a more reasonable loan elsewhere.
2.What are the Major Pitfalls of Auto Loans?
One of the major pitfalls associated with auto loans is paying too much because you do not have a complete understanding of the terms and conditions of the loan, or the ultimate overall cost to repay that auto loan.
To avoid making this mistake, always compute your payments in a comprehensive fashion. Don’t just look at the monthly payment and decide to take out an auto loan because that monthly installment is within your budget. The reason those incremental payments get lower is because the time it takes to actually pay off the loan gets longer. So you might wind up with a reasonable payment but end up paying it off for years – a situation that can leave you owing more the car is still worth.
Study the interest rate, too, paying close attention to the Annual Percentage Rate or APR. This is the rate of interest computed on the outstanding balance, so the lower the better. Get a low APR plus a shorter term loan and you have the right recipe for a good auto loan at a reasonable price.
Another mistake that is easy to make – but which most people don’t know about – is accidentally lowering your credit score by making too many credit applications. It’s better to gather auto loan information from lenders without actually applying for a loan or letting them check your credit history. Then pick the best one, run your credit on that one, and you’ll get your auto loan without dinging up your credit score along the way.
3.How Do I Avoid Getting “Upside Down” in an Auto Loan?
Another huge error that experts suggest you watch out for is buying a car with no equity or down payment. As soon as you roll the car off the dealer’s parking lot its price depreciates. If you didn’t any money down or offer a trade in with some cash value, that means that as soon as you drive away your car is worth less money than you still owe on it.
While it may be very tempting to buy a car with no money down and a low monthly payment, that sets you up for a long repayment period at a higher rate – and plenty of time for problems to occur. Because you have no equity in the vehicle – which is the difference between what you paid for it and what it is worth now – you won’t be able to sell it to a buyer willing to pay you enough to cover your loan. You’ll be stuck with it, in the dreaded situation known as being “underwater,” and you can drown from that kind of burdensome debt.
So pay a good-sized down payment or do a trade-in to get a cash credit, or do both. The more you invest in the car up front, the less chance you have of ever winding up “upside down” in the auto loan.
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