In a perfect world we'd all be able to pay for cars on the spot. In full. With our own money.
Unfortunately that's a luxury that not too many of us have. Car loans aren't just an option that's available, they're largely a necessity.
This being the case, it's important to get your car loan right. That means doing your homework. It means paying visits to financiers and dealers. And it means standing your ground in negotiations.
Let's take a closer look at how to make those things happen.
Getting preapproval accomplishes a few different things. Firstly, it ensures that you've done some self-assessment. To get preapproval from a bank, credit union, or independent lender, you'll have to take a close look at your income and expenses. You'll also have to evaluate your credit history. Even though most people already have a pretty good idea of where they stand financially, sometimes it helps to hone in on your finances and know exactly how much you'll feel comfortable budgeting and spending.
The more tangible benefit of this is that it gives you a bit of a bargaining chip in dealer negotiations. If you meet with a dealer and he or she offers you, say, an interest rate that is significantly higher than what you would be getting from a third party, then you can turn that around and demand something lower—or else you'll walk away and take that better offer.
A good rule of thumb for auto loan financing is that the deal with the shortest term (e.g. three years vs. five years) is almost always the best deal. To figure out why, look no further than interest rates.
Because interest diminishes as you pay off more of your loan, it's in your best interests (no pun intended!) to chip away at the loan as quickly as possible. Lower monthly payments may seem like a more attractive option, but the reality is that they will extend the term of the loan and ultimately drive up its aggregate cost.
Plus, since this is an auto loan we're talking about, it means that you'll also have a depreciating asset on the books for longer. That's never a great spot to be in.
One last tip: when you're evaluating loan terms, don't get tripped up by the conversion between months and years. Superficial as this may be, people are more likely to be intimidated by a term that's written in years as opposed to months. Think about it: eight years vs. 96 months. Even though they represent the exact same amount of time, eight years sounds inherently worse because people don't always instinctively make the connection between months and years. It's not like someone would accept a loan without calculating how many years their term would consist of, but sometimes it can get glossed over in the browsing process.
In a similar vein to the last paragraph of the previous point, it's critical to do calculations on the different offers that are available. When you're at an auto dealership, there will often be all kinds of perks to be had on different vehicles. It might be a $3,000 rebate upon purchase, or maybe an annual percentage rate (aka interest rate) of zero. It could even just be a staggeringly low selling price.
With these types of deals, you have to make sure you're looking at the whole picture. If you're getting lots of value in one area, it could be that the dealer is trying to catch you off guard by ramping up the cost in another one. Save yourself the headache later on and do the calculations now.
Sometimes you'll get to the end of an exhaustingly long negotiation, only to find out that in the drawn up papers you've been given, there are options for all sorts of hidden fees and certain stipulations that you hadn't even thought about up until that point. Examples of this include extended vehicle warranties, credit insurance protection, GAP insurance for accident coverage, and pre-payment penalties.
You're the one watching out for yourself in this whole process, so it's important not to just blindly accept these types of curveballs. They're not necessarily awful—it's possible they might even be to your benefit! Just don't agree to them without being comfortable first.
When you agree to an auto loan, there will in all likelihood be a clause about skipping payments. Doing so will leave you with an additional fee that gets slapped on to the term length and compounded in interest calculations.
Don't dig yourself a deeper hole than you have to. Make payments on time.