Whether this is your first vehicle purchase or your 10th, when shopping for an auto loan there are some basics you need to know.
- Know your budget. Plan for what you can afford, not only in terms of the potential loan payment, but also insurance, vehicle registration, and maintenance. Knowing what you can afford before you start shopping for a car can help you make a better financial decision.
- Know your financing options. There are typically three options for auto lending: Dealer-arranged, Bank financing, and Buy-here/Pay-here. Make sure to compare all your financing options to determine which one is the best option for you.
- In a dealer-financed loan, your financial and personal information is collected by the dealer and they forward it to many prospective lenders on your behalf. If approved, the lender(s) may authorize or quote a rate to the dealer to finance the loan, this is called a “buy rate”. Dealers can charge more than the buy rate, so you may be able to negotiate to lower the interest rate for your loan.
- With bank financing, you go directly to your bank, credit union, or other lender and apply for a loan. If approved, the institution will give you a quote or a conditional commitment letter to take to the dealership.
- A “buy here/pay here” or a “no credit check” auto loan is offered by dealerships that have “in-house” financing. Interest rates on these loans are typically higher than loans from a financial institution. If you have no credit or poor credit, this may not be your only option. There may be lenders that willing to finance your vehicle purchase, so shop around.
- Compare offers. When you are comparing offers you will need to look at the annual percentage rate (APR), the interest rate, and the length of the loan…not just your monthly payment. This will give you an idea of the total cost of your vehicle over the life of the loan. There are several loan calculators available online: NADA Guides has an easy-to-use one.
- Know the value of the vehicle. The NADA Guide and Kelley Blue Book are both sources to determine the book value of a vehicle. Understanding the current cash value will help you determine if the purchase price is a good value or not.
Lastly, if you are considering a co-signer, remember, as such they are asked to guarantee the debt. If you do not pay the debt, your co-signer is responsible for the payment and possibly any late fees or collection costs. Co-signing means more than just being a character reference, it means they promise to pay the loan.