Car Loan And How To Save On Auto Financing

Regardless of your credit score. Dealer will always try to sell you low monthly payments, zero down, and long car loan terms of four, five, even six years. Car Loan And How To Save On Auto Financing Learn more.

This is the opposite of what you want.

Lower monthly payments are a manipulative and old-as-dirt sales tactic. Dealers like them because:

• They confuse buyers and pacify negotiations.
• Create breathing room to sell you extras.
• Make it seem like you can afford more car than you really can.
• Please their lenders since they’ll make gobs of interest off of you.
• They make it seem like you’re getting a deal (when you’re actually getting screwed).

Suddenly a $470 car payment becomes a $350 car payment. And yet, you’re not paying any less for the car. In fact, you’ll be paying much more in interest.

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The longer you take to repay a car loan, the more interest you’ll pay. But that’s not all. Many times banks will charge higher interest rates for longer loans, further increasing your cost of credit.

It’s tempting to stretch out an auto loan over five or even six years to get to a more comfortable monthly payment. But this means you’ll pay a lot more in interest and almost certainly be upside down on your car for nearly the life of the loan.

Oh, and pro tip: Set up automatic payments for your Car Loan so you can ensure you never miss a payment.

In addition to shortening the term of the auto loan, you also want to minimize the principal.

The “principal” of the Car Loan is the total amount you borrow, and thus have to pay interest on. When a dealer offers you a Car Loan with zero down payment. They’re basically saying let’s maximize your principal so that my lender can charge you more interest.

Don’t Do It!

Place at least 20% down on your new car so that you can reduce your principal and thus the total amount of interest you’ll end up paying.

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If you can’t afford to place 20% down on the car you’re eyeing, chances are that you probably can’t afford the monthly payments plus interest over the course of the auto loan.

3. Get Financing Quotes Before You Go, If Your Credit Score Isn’t Perfect

If you have an excellent credit score (750+), you can usually get the best financing rates right from the dealership.

I’ve literally never said this before in all my time at Zerox24. But in this case, you really don’t need to shop around for the best rates.

This is because the dealer themselves will serve as a broker and show those with good credit the best options across multiple lenders competing for your high-credit patronage.

The tables are completely turned when you have a poor credit history, though. You’re the one the dealer will take advantage of, and you certainly won’t qualify for anything near “good” when it comes to rates.

4. Pay For Sales Tax, Fees, And “Extras” With Cash

Exhausted by your shrewd negotiations and preparedness, the dealer may still try to roll miscellaneous expenses into your financing options.

These may include their dealer fees (~$800), taxes (~7%-10%), extended warranties, and the cost of optional extras.

For example, they probably know that a $2,500 infotainment system upgrade is a hard sell, so they’ll say “upgrade your infotainment for just $17 per month.”

Sounds innocuous, but you might end up paying $900 in interest or $3,400 total on that friggin’ screen alone.

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Asking for an itemized invoice for all of these expenses, and paying cash, ensures a few things:

• You won’t pay $1,000+ in additional interest.
• The dealer will have a harder time hiding BS fees from you.
• You won’t pay for extras that you don’t truly want/need (like a 13” vs. 8” screen).

When negotiating, always ask for the “out-the-door price” – this is code for the bottom-line, no-nonsense price of the vehicle. Then discuss finance terms.

The first step to securing an ideal car loan is to check your credit report and score. You can do so right now, and for free, by visiting Credit Karma.

Dealerships will often advertise very good interest rates on new cars: 2.9%, 1.9%, sometimes even 0%. What they leave in the fine print is that these rates are only available to car buyers with the best credit-that may mean a score of 750 or better.

Dealers and banks will still “give you” a car loan if you have a poor credit score.

That’s because they know they’ll make tons of interest off of you, and if you don’t pay, they can just repossess it while you’re inside Trader Joe’s.

Buyers with credit scores in the low 700s can still get a lower interest rate but may not qualify for the best promotions.

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After that, rates rise quickly. If you’re a borrower with a below-average credit score (under 650), you may be presented with car loan rates of 10% or more.

The lower your credit score, the more important it becomes to shop around and make sure you’re getting the best rate a bank can offer you.

Yes, you may have to pay more than someone with a superior credit score, but you may not have to pay the first rate somebody offers.

Gap insurance (guaranteed auto protection insurance) is something car dealers and lenders sell you to cover the “gap” between what an insurance company thinks your car is worth and what you owe on your car loan in the event you’re in an accident and the insurer declares the car a total loss.

Let’s say you crash your car. The insurance company pays out $10,000, but you still owe $12,000 on the loan. Gap insurance would cover the remaining $2,000.

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The thing is, if you structure your auto loan properly with a 20% down payment and a short, three-year term, you shouldn’t need gap insurance.

With good loan terms, there should never be a scenario where you’d owe more than the car is worth.

So if your dealer is really pushing you for gap insurance, that might be a sign that your loan terms need re-evaluating.

7. A Few Auto Financing Tips on Car Loan Saving 

Unless you buy a rare Ferrari, your car is not an investment, it’s a depreciating asset. In fact, most cars will lose half their value in five years. Most luxury and sports cars depreciate even faster.

That’s why you generally want to pay off your car as soon as possible.

Dealers will try to talk you into some combination of a low down payment, low monthly payments, and long Car Loan terms (four, five, even six years).

Why?

Because they and their lenders will make tons of money off of you in interest that way.

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The longer you take to pay off your auto loan, the higher the likelihood that your car will go “underwater” or “upside down,” meaning you owe more on the loan than the car is worth (also known as negative equity).

That’s an awful place to be, because even if you sell the car tomorrow, you’ll still owe thousands on a car you don’t even have anymore.

That’s not to say that all auto loans are bad. Most of us use cars to get to our jobs and don’t have the cash lying around to buy a reliable ride, so we need a car loan. That’s totally cool!

But the key difference is this: an auto loan should help you get a car that you can afford, not one that you can’t afford.

I have the credit and income to go out and get a loan for a BMW M3. And I would love that car.

But that doesn’t mean I should get it. What the dealer will tell you you can afford for dealership financing and what you should spend are two very different things.

Use car affordability calculator to see what you can afford for an auto loan payment.

Ways To Cut The Cost Of Your Car Loan

1. Don’t Borrow Too Little for Car Loan To Save Money

If you only need a few thousand dollars, don’t apply for an auto loan. Instead, save your money (if your car purchase can be put off). Car Loan And How To Save On Auto Financing

Small car loans are paid off much more quickly than larger car loans. Since the interest on the loan is how banks make money, they don’t want your loan paid off quickly.

Because of this, smaller car loans often have much higher interest rates than car loans of higher amounts. This allows the bank to make a more acceptable amount of money off of you.

Of course, some car purchases are emergencies, and the only option may be the fast one. Set your car loan limit at $5,000; anything below that amount should come from your savings account.

2. Tighten Up Your Credit

The terms of your car loan are based on your credit score.

If you have perfect credit, you receive the lowest possible interest rate. And if you don’t, you have to pay more because of your questionable repayment history.

If you have problems with your credit and you don’t need to purchase a car right now, consider waiting until your score increases. Just a small increase in your interest rate can save you a lot of money over the life of your loan.

3. Don’t Stop At The Dealership

Just as your car dealer is a middle man when selling you a car, they are also a middle man when they want to set you up with a loan or a lease.

Middle men always get paid for their trouble, and the person paying is probably you.

Of course, you should get a financing quote from the dealer but if you stop there, you may very well end up paying too much for your loan. You probably did some shopping around for your car. Do the same for your loan.

4. Lease it

Leasing a car is generally considered to be a bad idea, largely because you’re paying a monthly payment and in the end, you will not own the car.

Is leasing really as bad as people say? If you’re somebody who wants a new car every few years. Don’t want to pay the repair costs that come with owning a car for an extended period of time. Leasing may be right for you.

Not only is the payment lower but in most states you only pay sales tax on your monthly payment instead of the total value of the car.

Since a lease is designed to charge you for your use of the car instead of the purchase of it, you also don’t incur the full cost of depreciation on the vehicle.

Leasing is not right for anybody who wants to own the car once all payments are made, but if you would rather not own a car, leasing may be a good choice for you.

5. Refinance Car Loan

Anybody who owns a home knows that mortgage rates have dropped significantly and because of that, refinancing their home makes a lot of sense.

What many consumers don’t know is that they can also refinance their car.

Not only does it lower the monthly payment, it reduces the amount of interest you’re paying which allows you to pay off our car loan sooner. Cars depreciate rapidly, making it imperative that you pay off your loan quickly.

6. Buy a Cheaper Car: Car Loan Saving Tips

It seems like an obvious and not so profound piece of advice, doesn’t it? Sadly, it isn’t as obvious as most would think.

The facts are clear in that America has an awful habit of purchasing what they can’t afford. They have an overreliance on credit and that could be a financial disaster if a life-changing event happened.

What’s worse, the country’s belief when it comes to financial matters. It’s ok to be drowning in debt for most, if not all, of our adult lives.

Do you have to purchase a new car? Or a pre-owned model from a few years ago to meet your practical needs for a car?

Do you really need a luxury car and have you really “earned the right” to purchase an expensive car? That will put you deeper in debt? It may seem like obvious advice, but it’s worth considering seriously.

Conclusion: Car Loan Financing Tips To Save Money

Unless you’re looking at 0% or another really low APR (annual percentage rate), the best way to buy a car is with cash.

If you have to get a car loan (whether that’s a personal loan or dealer financing), it literally pays to be as pragmatic as possible.

Know your credit score going in, and shop for a car loan before you go to the dealership. Use those offers as leverage to get the lowest APR possible. If possible, stick with your local credit union when getting a car loan.

These tips can help improve your car loan approval. If, in the end, you discover that you can’t really afford that cool car you were eyeing…well, better to learn that now than after you buy it! Car Loan And How To Save On Auto Financing 

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