8 Questions To Ask When Financing A Car
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For most people, car shopping involves also looking for a loan. In this article, we provide answers to essential questions to ask when financing a car.
Does My Credit Affect The Loan Rate?
Your credit rating absolutely affects a loan’s interest rate or even your ability to get a loan at all. The U.S. Federal Trade Commission estimates that up to 25% of credit reports contain an error. So, before applying for a loan, check your credit report for any issues.
The major credit reporting companies–Equifax, TransUnion, and Experian–provide one free credit report per year. Also, there are numerous online services available as well.
Keep in mind that some car lenders use a specific credit rating–called an auto score–that looks at your history with vehicle loans. Depending on your background, your auto score may be higher or lower than your regular credit rating. If you have limited or less-than-ideal credit experience, a down payment or co-signer may help with more favorable loan terms.
Importantly, limit your loan shopping that involves credit checks to a 14-day period. Your credit rating will drop slightly with each loan inquiry, but the credit agencies will only show a single inquiry even when you‘ve applied to multiple lenders over this two-week time.
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Do I Need A Down Payment?
It depends. Based on your credit situation, the lender may require a down payment or offer better loan terms when you provide a down payment of a certain amount. It may come down to personal preference, too. Would you rather have more money in the bank, or do you feel more comfortable having a lower monthly payment?
The general goal with any loan is to pay as little interest as possible. A down payment reduces the amount that you borrow, so you pay less interest overall. For example, let’s say you consider a 5-year loan for $30,000 with a 4.5% interest rate. You’ll pay $559 per month and $3,557 in interest over the life of the loan. A $3,000 down payment drops the monthly payment to $503 and saves more than $350 in total interest.
How Much Can I Afford?
This is probably one of the most important questions to ask when financing a car. Determining how much you can afford is a wise first step before considering any loan. Ideally, your car payment should be no more than 15-20% of your monthly take-home pay. This amount covers all your car-related expenses such as insurance, maintenance, and parking.
Once you’ve narrowed your car search down to one or two models, talk with your insurance company about the coverage costs for your potential car. It’s typical for premiums to increase for newer or high-performance vehicles. Use this opportunity to see what discounts might be available for advanced safety features like automatic emergency braking and even shopping around with other insurance companies.
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How Much Am I Paying For The Car?
If you’re buying a car from a dealer, don’t assume you’re paying just the window sticker or asking price. In addition to legitimate extras like sales tax and registration costs, many dealerships love to add all sorts of fees to a car’s selling price. So, hang on to your wallet and pen as we walk you through some things to expect.
Aside from the car’s selling price, which you may have been able to negotiate, look out for extra dealer charges:
- Processing or documentation fees–which may be prohibited or limited, depending on where you live–for preparing your new car’s paperwork.
- Title and tag charges–an additional fee, on top of valid costs for a vehicle’s title and license plates to handle the vehicle registration in your state.
- Prep Fees–a charge to clean and prepare your new car for delivery.
- Other charges–this can include an advertising fee, additional dealer markup, and dealer add-ons (like VIN etching or fabric and tire protection plans)
Questions to ask when financing a car including finding out about any extra fees. Don’t assume you have to accept these additional costs: there are more dealers out there.
Who Should I Finance From?
Always check first with the bank or credit union you already do business with. An existing customer may be able to take advantage of special rates and programs. Next, check out online offerings that can include companies that shop your application among different lenders. Several online firms offer a “soft credit pull” service that provides estimated loan terms without the inquiry showing against your credit.
Knowing the terms of your available loan before going to the dealer puts you in a better negotiating position. Keep in mind that the dealer makes money when handling your loan needs. They want to “sell” you a loan. There’s nothing wrong with this, provided the dealer’s terms are competitive with your other offers. Savvy car shoppers can even use these other loan offers to negotiate a better rate or lower vehicle price with the dealer.
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What Is The Best Length For A Loan?
The ideal loan is one that you can afford and charges the least amount of interest. Ideally, this means a loan for the shortest time possible. For instance, most lenders charge less for a 3-year loan than one for 6-years because there is less risk involved on their part. It comes down to what you’re comfortable with. Let’s took at two example loans, both for $25,000.
Loan #1: 36 months @ 2.5% interest rate
Monthly payment: $722
Interest paid (over life of loan): $975
Loan #2: 60 months @ 4.0% interest rate
Monthly payment: $460
Interest paid (over life of loan): $2,625
If you can handle the larger payments of loan #1, you’ll save $1,650 in interest—a not-insignificant sum. Regardless of the lender, always explore various loan options and see how the loan’s length affects what you’ll pay. However, some new car dealerships may offer automaker-supported zero- or low-interest car loans. Checking with the dealer about special loan rates is always one of the questions to ask when financing a car.
Should I Buy A New Or Used Car?
It’s OK if you’ve already made up your mind in the new versus used car debate. If you are undecided, consider the pros and cons of each approach.
There’s no right or wrong answer here. Some car owners are appalled by the typical 50% drop in value that new cars are hit with after five years of ownership. Yet, other shoppers are comforted in not buying a used car and “someone else’s problems.”
Pros
New
- Latest Style and Tech
- Manufacturer Warranty
- Lower Maintenance Costs
Used
- Lower Cost
- Less Depreciation
- Lower Insurance Cost
Cons
New
- Higher Cost
- Major Depreciation
- Higher Insurance Cost
Used
- No or Limited Warranty
- Higher Maintenance Costs
- Uncertain Vehicle History
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Should I Lease Or Buy?
The monthly payments for a vehicle lease will usually be less than with a car loan. This can make for an attractive option, but there are important differences between leasing and buying. Leasing is ideal if you:
- Like driving a new car every few years
- Don’t drive an excessive amount of miles
- Can keep the car in good condition throughout the term of the lease
- Don’t mind a lack of equity when the lease is over
Because a lease has more upfront fees, a regular bank loan will cost you less for the same car over the long term. You’re also likely to have some equity (“trade-in value’) at some point with a loan-financed car. When a lease is over, you return the vehicle and have nothing to show for it.
