Drive Away with the Best Deal: Securing an Auto Loan That’s Ready to Roll
July 31, 2024
Are you in the market for a new or used car that’ll involve a loan? Here are some important steps to take before you take a test drive.
Calculate the cost
A car can be a very emotional purchase, and that makes it a potential budget buster. So, before you set your heart on a new set of wheels, see if it’ll fit—not in your garage, but in your monthly budget.
If you don’t already have a budget, now’s the time to put one together. Here’s the recommended process. List your gross income at the top, then list all of your outgo categories. Start with generosity, then saving and investing, then your essential expenses (housing, food, utilities, debt payments, etc.), and then discretionary expenses (entertainment, vacations). Ideally, income minus outgo will equal zero.
How well does a car payment fit into your budget? How much of a car payment?
Check your credit score and report
Your credit score is a three-digit number that represents your financial reputation. Any time you use credit, three main credit bureaus are keeping tabs. Do you pay your bills on time? How much of your available credit are you using? That information and more is used to come up with your credit score. The higher the number, the better.
When it comes to an auto loan, the higher the number, the more willing lenders will be to work with you, and the better the terms will be. This calculator will show you how your credit score may impact your auto loan interest rate.
You may be able to get your score for free from your bank or credit card company. Or, use the free plan offered by Fair Isaac Corporation, the company that invented the credit score.
If your score is on the low side, keep in mind that the number is updated regularly. You may want to hold off on a purchase until your score improves.
Paying your bills on time is the single most important contributor to a good score, but check your credit reports for any errors as well. (Request a free report from each of the three main credit bureaus at annualcreditreport.com.) If you spot any problems, such as an indication that you made a late payment when you’re sure you didn’t, your credit report will have directions for filing a dispute.
Shop around for the best loan terms
Just as you are probably shopping around for the best deal on the car you are interested in, shop around for the best loan. There are several lenders to explore: banks, credit unions, and even the automobile manufacturer or dealer where you are considering purchasing a vehicle. (Keep in mind that dealership financing is often the most costly option.)
Compare total costs, not just monthly payments
Lenders may ask you how much of a monthly payment you’re looking for. They have various methods for making a monthly payment amount fit, such as stretching the length of the loan. Of course, that means more monthly payments and more interest charges. Plus, longer loans often carry higher interest rates.
For any loan you’re considering, be sure to find out not just what your monthly cost will be, but what your total cost will be as well.
Check the fees and fine print
Ask for a list and explanation of any fees that are part of a loan you are considering. While zero-percent financing probably sounds enticing, ask questions! Are you getting the best overall price for the vehicle? Are there any required dealer add-ons, such as a pricey extended warranty? What happens if you miss a payment?
See if the loan you are considering includes a prepayment penalty and try to avoid that. It would be ideal to have the freedom to pay the car off early without having to pay extra for the privilege.
Buying a car can be an exciting experience. Making a good decision about how to finance it will keep the experience positive long after you’ve driven the car home.
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Matt Bell is the author of Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.
