So you’ve decided that you want to get financed for a car and are ready to go shopping. Wait! If you go into a financing office without being prepared, you might pay more than you should. Before you go, prepare. Then you can make an informed decision that will be the best for your budget. Here’s what to do:
Check your credit report
First things first. Your credit history determines whether you’ll be approved and what interest rate you’ll pay. Know what to expect. Head over to Credit Sesame to get your free credit report cards so you know where you stand. Check for any errors, and find out your score. If you do find discrepancies in your report, get to work clearing them up right away before applying for a loan. If your score is under 600, work on raising it before applying for a loan.
Once you’re ready to shop, get pre-approved for a loan. Pre-approval means the lender has checked your credit and is prepared to offer you a loan. Qualification depends on debts, income, credit score and credit history. Pre-approval gives you more negotiating power when you shop for your car because the money is virtually already in your hands.
Take your pre-approval to other financial institutions and car dealerships to see if they make counter offers. Hard inquiries do have the potential to lower your credit score, but auto loan inquiries are ignored for the first 30 days. Then, all auto loan inquiries made within 45 days count as a single inquiry. This allows you to compare loan offers without serious penalty to your score. Some lenders might offer you lower interest rates or longer periods of time to pay off your loan.
Set your budget
Once you know what kind of loan you are approved for, set your budget. Be realistic about what you can afford each month. A realistic payment might be far lower than what the lender says you qualify for. Use an online auto loan calculator to see what your monthly payments will be at different price points. Once you know what you can afford, you can shop for cars in that price range.
Decide on gap insurance
Gap insurance is typically offered at the time of purchase through a car dealership. Its purpose is to cover the difference between what is owed on a loan and the value of the car in the event that the car is totaled early in the loan period. For example, you might buy a car for $20,000. Once you own it for a month, its book value may only be $16,000, but you probably still owe over $19,000 on the loan. If the car is totaled, the insurance company will only pay out its actual cash value. That means you would be required to pay $3,000 out of pocket to cover the shortfall on the debt.
Many car dealers offer gap insurance at the point of sale. If you want this coverage, you might be able to get a better deal through your own insurance company.
Study cash rebates vs. low interest
Many dealers offer a lower interest rate or an instant rebate. The lower interest rate reduces the amount of interest you will pay over the life of your loan. The cash rebate can reduce the total loan balance. Do the math to see which option saves you more money. Also consider the monthly payment and the number of years you’ll pay to decide which is most important to you. Consumer Reports has a handy calculator to help you make the comparison.
Have a plan to pay off your existing car loan
As a way to draw you in, car dealerships will frequently offer to pay off your existing car loan. While this sounds like a good deal, look closely at the offer. Will they increase the rate on your new car loan to make up for the amount they have covered for you? Remember, they’re in business to make money, and they won’t give it away for free. For most consumers, it makes the most sense to pay off your own existing loan. If you can’t, at least figure out the cost you’ll pay for letting them help you out of the old and into the new. What you don’t want is to be stuck with a low-value car years in the future when you’re still paying on considerable debt.
Research your trade-in value
If you decide to trade in your vehicle, make certain you know how much your car is worth before you take it to the dealership. Kelly Blue Book is a trustworthy place to check your car’s current value and you can get the information quickly online if you know all of your vehicle information. You can usually get more money for your car if you sell it privately on your own, but that also requires more time and effort on your part.
Ask for a breakdown of the prices
Before you agree to any loan, ask for a written breakdown of the entire purchase. As a way to pay you less for your trade-in, or charge you more for add-ons, the lender may try to group all the costs together in one lump sum. This makes it difficult for you see what type of loan you are getting, how much you are being charged for every option, and what they are paying you for your trade-in. A breakdown helps you ensure there are no mistakes (intentional or accidental), and allows you to compare the final terms to your pre-approval and the other loan offers you considered.
The only way to avoid overpaying or getting into a loan you don’t understand or can’t afford is to be fully informed during the entire purchase process.
Love Counting My Pennies?
Sign up to get our latest content by email.