9 Things You Should Know Before Taking Out An Auto Loan: Are you thinking about buying a new car but aren’t sure if you can afford it? If so, it may be time to take out an auto loan. It’s important to understand the process and how much of an impact taking out this type of loan will have on your finances in the long run. Here are 9 things you should know before taking out an auto loan that will help you figure out if you can afford this purchase or not and make an informed decision when choosing between financing options to pay for your next vehicle purchase.
1) Calculate Your Monthly Payments
The auto loan calculator is pretty much what it sounds like—it’s a tool you can use to figure out how much your monthly payment will be. To do so, simply put your loan amount, interest rate, and term (in years) into our easy auto loan calculator. We’ll also ask for some personal details, such as your income, employment status, and annual savings goals. All of these pieces of information factor into calculating your monthly payments—and they help us build an accurate picture of what you can afford while we shop rates on lenders that are looking for people just like you.
2) Determine The Total Cost
The amount of interest that is calculated over some time is typically expressed as an annual percentage rate (APR). For example, say you took out a loan with a 12% APR. In one year, you would be charged 12% of your initial loan balance. At the end of two years, 24%. And so on until your principal has been paid off. If you borrowed $10,000 at 12%, in two years, you’d owe $11,120—that’s an additional $1120!
3) Compare Interest Rates
Your auto loan interest rate will be based on several factors, including your credit history and income. The lower your score and income level, typically, the higher your interest rate will be. Once you know what type of loan you’re looking for (see No. 1) it’s time to research interest rates. Sites like Bankrate and CreditKarma can help you compare rates from different lenders side by side to help make an informed decision. If you’re working with a broker or bank that specializes in car loans, call them up (or visit their office) to get details on current offers before choosing a specific lender.
4) Avoid Dealer Incentives
Research indicates that once you take incentives into account, you should expect to pay at least $250 more for a new car than what’s quoted. For example, if you’re offered $1,000 off of your purchase and financing over five years, that’ll reduce your monthly payment by about $30. However, with an interest rate of 5 percent (which is average), you’ll end up paying another $20 per month on finance charges—meaning your actual monthly payment is higher than what was quoted. It’s smart to keep dealer incentives in mind when shopping for a new car; however, don’t base your purchasing decision solely on those discounts. To avoid paying more than expected for a new car, do some research before going to a dealership.
5) Check For Hidden Fees
When taking out an auto loan, you may want to shop around and research more than one lender. Auto loans can come with hefty interest rates, so you don’t want to accept your first offer. Do a little research before accepting a deal, and don’t be afraid to ask for time-sensitive offers or discounts. Remember: Shopping around is smart—particularly when taking out an auto loan with high rates. So if you find yourself in search of an auto loan calculator, look for something that gives you a better idea of what kind of monthly payment to expect on your next car purchase. Having an accurate understanding of what’s involved in taking out an auto loan—including any potential risks—will help you make smarter decisions about your borrowing options over time.
6) Research More Than One Lender
If you’re shopping for an auto loan, it pays to shop around. A lot. Not only will you be more likely to find a low rate and payment, but by speaking with several lenders, you can also ensure that your deal is fair. For example, say one lender offers a 2 percent discount on your annual percentage rate (APR) if you extend your loan over four years instead of three; another lender throws in three free oil changes. If those extras save you money over time, then it’s worth taking them into account—even if it means signing up for a longer-term loan or a higher interest rate.
7) Inspect The Vehicle Closely
The first thing you should do when considering an auto loan is to take a close look at your credit report and make sure there are no errors that could be preventing you from obtaining a loan. If you have mistakes in your report, clean them up as soon as possible. You can order a free copy of your credit report once every 12 months from each of the three credit bureaus: Equifax, Experian, and TransUnion. Once you’ve inspected your reports, it’s time to shop for an auto loan. The best way to find one is by asking around for references. Ask family members or friends about any positive (or negative) experiences they’ve had with dealerships in your area.
8) Borrow Only What You Need (Or Can Afford)
Most auto dealers will recommend you take out an auto loan equal to 60 percent of your car’s purchase price. That’s a bad idea. The higher your loan-to-value ratio, or LTV, the more you risk ending up underwater if you don’t maintain a high credit score. For example, if you buy a $20,000 car and finance it with a $10,000 loan at 5 percent interest over five years, your monthly payment will be about $273. Over that period, you’ll pay about $531 in interest on that portion of your debt—about 20 percent of what you originally borrowed—and end up paying about $13,583 for an asset worth only $10,000.
9) Don’t Forget Taxes And Insurance
Keep in mind that there are two costs to keep in mind when taking out an auto loan: monthly payment and total cost. It’s important to budget not only for a decent car payment but also for how much you’ll need to set aside every month for insurance and taxes. This includes state sales tax, vehicle title fees, and more. And don’t forget about maintenance costs! If you make a purchase now, it’s important to consider all of these expenses; they can add up quickly. So before you commit, crunch some numbers (with our auto loan calculator) to determine your future car ownership costs as accurately as possible. The peace of mind could be worth a few hundred dollars per month—and that makes it worth it!