Buying a new car can be such an exciting time. The best thing about getting a new car is the smell. There is nothing like sitting in your new car for the first time and inhaling the smell of leather. It probably has so many new gadgets and features that you need to spend some time learning all about your new car. There are so many options available on the car market, it is hard to narrow it down to just one. There are some downsides to new cars and that is the new car loans.
All You Need to Know When Using an Auto Loan to Buy a New Car
Before you get super excited about your new car and start taking cars for a test drive, you must have a basic understanding of auto loan details. I know these are the details that no one really wants to spend time learning. However, it is important to learn some key facts about them. Auto loan shopping is a little different from shopping for a personal loan.
There are a few different sources from which you can obtain an auto loan. You can get financing, or a loan, directly from the car dealership, or a traditional bank, or a credit union. Or you could even borrow money from family or friends. You make a promise to repay the lender with regular payments, usually monthly. The lender charges you interest as a fee for allowing you to borrow the money. The lender selects the interest rate and it is based on your credit score. The better your credit is the lower your interest rates tend to be. It is important for you to shop car loan rates so that you can find the best one for you.
Auto loans are considered secured loans because the car you are buying becomes collateral for your loan. If you do not make your payments, the lender may take ownership of your car. You do not actually own the car until you pay off the loan. Most lenders require you to have full coverage auto insurance. They want to make sure you have full protection in case you are in an accident.
Can I Get A New Car with a Loan from a Car Dealership?
Just about every dealership has a finance department through which you can obtain a car loan. Most of the time when you finance a car through a dealership, the carmaker is who is actually financing the loan. For example, if you are interested in purchasing a Mazda CX 9, it is Mazda that is doing the financing. When you use the dealer to finance new car loans, it often makes the process easier for you. When you go through the dealership to get your auto loan, you do not have to do a lot of searching for the right loan. Often, the dealer has several different loans available and will give you their best offer, or give you a few from which to select.
The dealership handles all of the financing for you, so you really do not have to do anything, but sit there. Unfortunately, you may have to sit for many hours while waiting for all of the paperwork to process. While you may have to wait in the dealership for quite some time, all of the processing is finished in just one day. You also have the benefit of already knowing what type of vehicle you want and how much it will cost. There are a few other advantages to obtaining a car loan from a car dealership. Some of those benefits are special promotions that only the dealership can offer. Obtaining a loan through the dealership may also allow you to negotiate a better rate for the interest or a lower overall price for the vehicle.
Can I Negotiate An Auto Loan?
There are many car buyers that negotiate new car loans. There are some aspects of a car loan that you can negotiate and there are others that cannot be negotiated. It is key that you understand the difference. You can negotiate the interest rate and the terms of the loan. The terms of the loan indicate the overall length of the loan and may shorten the period that you are paying for the loan. When you shorten the period that you are paying for the loan, it decreases the amount of interest that you pay. You can also negotiate any warranties or upgrades for the vehicle. If you are trading in another car, you can negotiate the trade-in value, so you might be able to get more for the car you are trading in.
You cannot negotiate registration fees or taxes. These are set by the state so they cannot be changed. Remember, you do not know what kind of rate you can get for your auto loan until you ask. The lender may not give you the best offer upfront because they want to make money. You should always do comparison shopping when you can.
How Do Car Loan Payments Work?
There are a few things you should also know about car payments. The most important thing to know about new car loans is that you must be able to afford it. The lender is not giving you the money for your car as a gift. You must make regular payments. Those payments may be monthly or bi weekly. Most lenders will automatically debit your bank account for the money. If you pay bi weekly, you make half the monthly payment every two weeks.
You end up paying off the car about four months earlier because there are two months where you may three payments. Basically, if you pay monthly, you make 12 payments of $958 (using the example above). At the end of the year, you end of paying $11,496. If you make bi weekly payments, you make 26 payments of 479, which means you pay $12,454 at the end of the year. This way, you pay off your car sooner.
If you do not make your car payments, the lender will repossess your car. Your car is collateral for your loan and that means if you do not pay, they take your car. Do not think for one second that the lender will not come get your car. Ok, well, the lender will not, but someone working for the lender will. Not only will they take your car from you, but it will have a negative impact on your credit score. The bottom line is to make sure you can make those car payments. You do not want to find yourself in that situation.
Can I Decrease The Amount Of My Auto Loan?
There are always ways to decrease the amount of money you borrow for new car loans. You should make sure your credit is in good shape before you borrow any money. The better your credit score is, the lower your interest rate is going to be. The lower your interest rate means a smaller monthly payment.
Pay attention to how much money you borrow. If you only need a couple thousand dollars, then you should try to save the money instead of borrowing it. Small loans amounts tend to come with high interest. You can usually pay off a small loan quickly and the lender does not make as much on a small loan, so they charge more in interest.
You may want to consider buying a cheaper car. Cars often have a high price tags. Do you really need a luxury car that is going to cost you a lot of money? You should look at used cars to see if you can find one that will suit your needs. With a little research, you may be able to find a used car that has low mileage and was really want cared for by the owner.
Keep this in mind when you are deciding how much you are willing to pay each month for a car. The car only loses value; few cars increase in value once you buy them. You will never make back the money you spend on a car.
Can I Pay Off My Car Loan Faster?
There are quite a few ways to pay off new car loans faster. Cars are expensive and as a result, most car loans take six to seven years to pay. Lenders have increased the amount of time they allow you to repay because of how much they cost. When you are considering new car loans, keep these ideas in mind. I mentioned above that you can make your car payments bi weekly instead of once a month. Even if your loan is supposed to be repaid once a month, you can make two payments a month as long as you pay the full amount by the due date. If you make payments bi-weekly, it allows you to pay two more payments per year and save about $2,000 a year in interest.
You can also round up your monthly payment each time you make it. In the earlier example, the monthly car payment is $958.33. You can easily round that payment up to $1000 and you will save money on interest over the entire year. And you could save several thousands dollars over the course of a year. You can also make a large payment at least once in the year. Continue to make your monthly, but also make one large payment to help pay off your loan sooner. This can speed up the length of time you will pay off the loan.
Some lenders may allow you to skip one or two payments in each year, but do not do it. It increases the length of time it takes for you to pay off the loan. In addition, the interest increases during those months that you are not making monthly payments.
What Is Interest And Why Does It Matter?
The shortest answer is: interest is a fee given to you by the lender for allowing you to borrow money for new car loans. The higher the interest rate is on your loan means you pay more money per month. Your interest rate is dictated by your credit score. The lower your credit score is, the higher your interest rate will be. There are a few more things that you should know about interest. The actual amount you borrow is called the principle. The lender adds the interest rate on top of the amount you borrow. Lenders add interest at a higher interest rate to loans they consider high risk, such as to those who have bad credit. Loans that are lower risk are given a lower interest rate.
To highlight this, I will give you some numbers as an example. These are only examples, not real offers:
You want to borrow $40,000 for a car (it is a really nice car). And you have great credit, so the lender adds 5 percent interest. You would like the payments to be a little lower, so you opt for a 48 month, or 4 year, repayment period. 5 percent of the $40,000 you borrowed is $2,000. Remember, the principal amount is $40,000 + $2,000 interest = $42,000 you are borrowing. Your monthly payments are $875 (remember it is a really nice car). That is $42,000 divided by 48 months.
The same exact situation except with bad credit looks like this… you are borrowing $40,000 but your credit is bad and that adds 15 percent interest to your loan. 15 percent interest equals $6,000. So, you have a principle of $40,000 + $6,000 interest = $46,000 total. Your monthly payments are $958.33. That increases your monthly payment more than $83 per month.
You can see how quickly the payment jumps up when you have poor credit. I used an extreme example with a $40,000 car. The difference would be smaller if the total of the car was less.
Can I Use A Credit Card To Buy A Car?
You can use your credit card to purchase a car instead of new car loans, most of the time. Some dealerships may have some restrictions on using credit cards. They may let you use a credit card to purchase additional items or services for your car, but they may not let you buy a car. When you use a credit card to make a purchase, there is a fee for it. The dealership has to pay the 1 to 3 percent fee. Some dealerships do not want to pay that fee. They can make more money if you finance the car through them, so they require you to finance the car.
If you can find a credit card offering you a special promotion of 0 percent interest for a specified amount of time, a credit card might be a good idea. It is only a good idea if you can pay off the credit card before the time period ends. Otherwise, you could be charged for all of the interest. It could be a really large amount to put on your credit card and could cause you to have high payments, which may be higher than new car loans. And it could also negatively impact your credit score as it increases the balance you are carrying on your card. It also increases your debt to income ratio. You should really carefully consider if using a credit card is the best idea for you. Just because you are able to do so, does not mean you really should.
Should I Budget For My Car?
It is always a good idea to create a budget, not just for new car loans, but in general. A budget gives you an accurate idea of your income and your expenses. Many of us have no concept of how much money we spend each month. We do not even realize where we are spending most of our money. The best way to determine those things is to create a budget.
I know few of us really want to create a budget. It can be time-consuming. It can also be an eye opener for you when you realize how much money you spend each month. However, it also can be the greatest gift that you give yourself. It puts you in the driver’s seat and gives you control of your finances. While it may be challenging to start, ultimately it is the best thing you can do. It teaches you where you need to make cuts in your spending. You also learn what is most important to you and what you are willing to compromise. If you want to create a detailed budget, that can certainly take some time. You can create a quick start budget for yourself to give you an idea of where you should make cuts.
You can list all of your monthly income in one column and list your monthly expenses in a separate column. Then you add both columns and subtract your expenses from your income. Hopefully, you have a positive number. If not, you definitely need to make spending cuts.
Can I Save Money To Buy A Car?
You can absolutely save money to buy a car. You should already have a plan for saving. If you want to save money for a car, it should be additional savings. It should not be your only savings. While it may be better to pay cash for a car instead of taking on a loan, it is not smart to take all of your savings to pay for a car. You do not want to leave yourself without any savings. In that case, it makes more sense to obtain a loan.
However, if you want to create a separate savings budget to purchase a car, there are most likely places you can make changes in your budget. You should look for quick and easy places where you can make changes. Look for places where you are spending money for items that you are not using. Many of us have that gym membership that we are not using. If you have one, too, that you are not using, cancel it. You should cancel it right now. That is a complete waste of money. It is an easy way to find some savings.
The money that you would pay for the gym, immediately begin putting in a separate account. Now, you can look for other areas where you are spending money for items you do not use. Do you pay for any subscription services? If so, do you really need them? Do you need to receive them as often as you do? Do you have a stockpile of whatever items you have automatically shipped because you really do not need them as often as they come? It may be better if you take control of your subscriptions. This way you order them and pay for them only when you need them, instead of when they are shipped.
When considering new car loans, it is important that you know how to shop for a car loan. It is also important that you find the right one for you. The right one is the one that you can afford to repay. It is a really nice feeling to get a new car. It fills you with a sense of pride to sit in your new car. However, you must remember that a new car comes with a new car payment. There is nothing worse than the feeling of having your new car taken away from you. Before you consider what car you want, consider the car payment. The first step you should take is making sure your car payment fits into your budget.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.