Things You Should Consider Before Getting That Car Loan

Car Loan
Car Loan
Car Loan

Buying a car is among the most important financial decisions you will make in your life. But according to a recent study, more than 40% of Americans tend to carry their auto loans longer than they own the car. Generally, these loans can be quite complicated and some people don’t have sufficient knowledge about the credit options.

Because a lot of people rely on cars to commute to work as well as run other errands, the dependence on auto loans has risen due to low rates. As such, it is likely to be exploited if you are not conversant with how the loan works.

Do you really need a car?

Using a personal car for daily transport needs is quite convenient for most people. However, the uses for a car can vary from person to person. If the main aim is to use the car for daily commuting to work, you need an option that can handle congested traffic. As such, you may need to avoid a luxury car for this purpose. On the other hand, an automobile that is needed for occasional weekend getaways; you need something with appropriate mileage.

To make a good financial decision, you need to look closely at other things that you may spend the cash on. If your vehicle is in good condition, you may afford to wait before getting another one. But if you need to make repairs that can be too expensive, getting a better car can be a great idea.

Interest rates and loan term

Before giving your consent for an auto loan, it is important to determine if you can comfortably handle the payments. If a car loan has more than average interest rate and it is spread over a long time, your finances can suffer from excessive pressure.

If you have a good history with the lender, it is possible to negotiate for better interest rates. Having high credit scores can help you get a lower interest rate, which in turn reduces the cost of borrowing. At the same time, you should consider several lenders and see who can offer you the best rates.

While the repayment periods for most car loans are getting longer, people make lower monthly payments, but this also makes the loans more expensive. Basically, you should stay away from a lengthy car loan for a second-hand vehicle since they may not be operational for a long time.

Additional fees

Before jumping on the deal, it is important to consider the cost of paying the borrowed amount early. At times, you may want to pay the loan earlier than you had planned. For instance, this is quite necessary when you have to trade in the car for a better car. If there are charges associated with early payments, the cost of borrowing will shoot up.

At times, you may come across lenders who tell you that you won’t be required to make payments for the first six months. From the surface, it is easy to think that you are given a grace period while you are still using the car. But the truth is far from this since some financiers will still be charging interest during the grace period. As a result, you will need to pay interest for an additional six months, meaning the loan is more expensive than it may seem.

Can you afford the costs?

Buying a car comes with some additional costs. Typically, you can get a financing deal where you are not required to provide a down payment. While this can be an attractive offer, you may end up paying the loan for a long time. If you put a large down payment, it becomes easy to clear the outstanding balance. Since cars tend to depreciate quickly, it is important to establish a savings account and make a down payment. Without a down payment, you will be paying for something that is worth less than the outstanding loan.

Maintain a car in a good working condition can be quite expensive considering that fuel prices are getting higher. Besides, insurance and regular service can add a burden to your budget. As such, consider the costs associated with owning a model and make sure you can weather the financial stress introduced by car ownership.

Choose the lender wisely

You can either access an auto loan from a lending institution or through your dealer. Basically, it can be enticing to get a loan through the auto dealer since it is quite convenient. However, the dealer may be receiving some incentives that can make your loan more expensive. If you can’t compare the offers from the dealer, it is best to deal with the lender directly.

A captive lender is a financial organization that is owned by an auto dealer, but a direct financier has an agreement with the dealer. Knowing the exact relationship between the finance provider and the lender will help you when determining if the deal you are getting is the best.

Final words

While shopping for an auto loan isn’t as interesting as shopping for the next ride, it is a decision that can have a huge impact on your life. To be on the safe side, make sure you have considered your options carefully.

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