Unless you’ve been hoarding cash for the last ten years or you just won the lottery, you’re probably going to have to finance your new car through a loan. This isn’t a bad thing, though. Currently, interest rates are so low – roughly between 2-4% for buyers with “Excellent” credit and in some cases dealerships will offer 0% financing – that you don’t even need to make a down payment if you don’t want to. Here is some advice on how to finance your new car.
Can You Pay in Cash?
If you’re a super saver and can write a check for your car, in full, without totaling your bank accounts then by all means do it. By avoiding making interest payments, you’ll save yourself at least a few thousand dollars on the final bill.
How Much Should You Put Down?
If you’re financing a new car, we recommend putting down 20% of the car’s total value as an initial payment. This will knock out a fifth of your total loan up front, making it easier to pay off your loan in time. If you’ve got excellent credit and can secure a low interest rate for your loan, such a large down payment may not be necessary. In general, though, the more you can afford to pay for a car up front, the better off you’ll be.
Who Should Lend You Money?
There are a few different lenders who will be happy to finance your new vehicle, but that doesn’t mean you should accept the first offer you receive. Shop around with different lenders and then pick the loan that’s best for you. Here are some of the most common types of loans you can receive.
A Dealer Loan
Every single dealership will offer you financing through one of their affiliated banks. Since dealers are so “accepting” of borrowers, a dealership loan may be the only option for young buyers with limited credit or buyers with bad credit. This accommodation comes at a price, though. The interest rates on dealership sponsored loans tend to be several percentage points higher than other institutions, which could translate to several thousand dollars more in interest throughout the term of the loan.
A Bank Loan
If you have a good credit rating, you may qualify for an auto loan through a local bank. These loans are almost always preferable to dealership loans. The only catch is that often you need to get approval from the bank before the dealership will let you take the car home. Often this means seeking pre-approval before the dealership finalizes the loan.
A Credit Union Loan
Credit Union loans often carry the best interest rates on the market. However, credit unions only lend money to their members, also known as the consumers who hold accounts with them. If you aren’t already a member, it will be a pain to sign up and open an account just for the sake of obtaining a loan.
What Type of Loan Should You Get?
After shopping around different lenders, you should choose the loan with the lowest interest rate. You will also have to choose how long of a term you want for your loan. Most auto loans come with three, four or five-year terms. If you can afford it, go with a three year term. Your monthly payments will be higher but your total cost will be lower. As a general rule, your monthly auto expenses – including fuel, insurance and loan payments – shouldn’t exceed 20% of your disposable income. By disposable income, we mean the money that’s left over after you pay all your other bills for the month. If you find that a three-year term would put your payments over this threshold, then we recommend taking the five-year term instead. The stability provided by lower payments will be more than worth the extra interest.
Double Check and Then Sign
Once you’ve got your loan ready to sign, read through everything – twice. As soon as you put your signature on the paper, you legally submit to all of the terms outlined in the loan so it would behoove you to make sure that they’re all 100% correct. After you verify everything, go ahead and sign the loan. Now that the keys are in your hand, it’s time to take your new car out for a spin. Get a few friends together for a joyride and enjoy the smell of new car while the wind rushes through your hair. And be ready to chide your passengers for trying to remove the plastic protective covers on your radio. After all, it will stay new as long as the plastic sticks on it, right?