September 29, 2006
By: Jim Oosterman
For many people a car is one of those necessary evils. You need it for transportation, but paying for it can be one of your biggest financial challenges. Unless you have enough cash, you'll apply for some type of auto loan. Here is some advice to make sure you don't get taken for a ride.
Check your credit and know your budget
As with mortgages or any other financial loan, one of the first things you should do before applying for an auto loan is review your credit. All American consumers are entitled to one free credit report per year, so get one. Find out if there's anything you need to fix or any errors that could affect your auto loan rate.
It's important to know how much you can spend, especially if you don't already make monthly car payments. Track your budget and use the auto loan calculators available on your bank's web site or use the Consumer Connection page of the American Banking Association's web site at www.aba.com to give yourself an idea of what you might have to pay for the new car.
Though it seems convenient to do all of your paperwork at the dealership when you decide what car to buy, you don't have to get your auto loan there. Check with a bank, credit union, or online lender. There's a chance a better loan option can be found elsewhere. Most lenders will pre-qualify you for an auto loan so that you know you'll have the financing before you sign with the dealer. By consulting with a lender before talking with the salesperson, you'll be more educated about what's fair, and that might give you some bargaining power.
Don't be fooled by lower monthly car loan payments. Dealers might quote a lower monthly payment than your bank, but the dealership's auto loan could be 72 months, and your bank's auto loan may be for only 36 or 48 months. Make sure you're comparing like terms. It's easy to divert your attention away from the interest rate by focusing simply on the lowest monthly payment. Always verify the dealer's numbers with a loan calculator, making sure monthly car payments match the selling price and interest rates that you expect to pay. Be sure to find a lender that will allow you to make extra payments or pay off the loan entirely without any penalties. It's important to read the fine print related to such penalties.
Home equity can fund your loan
If you have equity in your home, look into a home equity loan or line of credit as a borrowing option. You can usually deduct interest from home equity loans on your taxes, effectively reducing your interest rate. Interest for home equity loans might be higher than car loans, but the tax savings could make up for the higher rate.
Road blocks to getting the right loan
If you trade a used car in for a new car loan, make the dealer put in writing that they'll pay off your old car loan in 10 days. If they won't, walk away from the deal. When they don't pay it off in a timely manner, they're actually paying you less for the trade-in. And if the bank calls, you are responsible because the old car loan is still in your name until the dealer pays it off.
Be prepared when you go to buy a car. Check your credit, know what interest rate you can qualify for and look into home equity loans as a borrowing option. Ask the right questions and remember to do the math yourself instead of trusting the salesperson. That is how you will avoid bumps in the road and get the most mileage out of your auto loan.