With the price of new and used cars skyrocketing, many buyers are turning toward financing options to purchase their next vehicle. Whether it’s your first or fifth car, it’s important to understand a few basics about auto loans before you step foot on a dealer’s lot. When equipped the right knowledge, you can ensure you walk off the lot with your dream car and a manageable monthly note.
In this post, we’ll walk you through some tips for financing a car the smart way so you can feel confident in your next auto purchase.
Save a Down Payment
One of the best things you can do is treat buying a car like a buying house. That means saving up at least a 20% down payment for your next vehicle. This helps you reduce the amount you need to borrow and can sometimes even get you better auto loan rates.
Do some research into the types of cars you’re interested in purchasing and see how much each of them costs. Then draw up a budget for how much you’re willing to spend and figure out what 20% of that total is. That’s your new savings goal.
Keep It Simple
It’s easy to get wrapped up in all the advanced features and different trims in new vehicles. However, these all come at an added cost too. If you’re financing a car, it’s wise to stick to the base models of the cars you’re interested in to keep costs down. This can help you keep overall costs down, which keeps your monthly note down.
Get Pre Approved
It’s wise to get preapproved for a car loan before you step foot on a lot. This gives you more purchasing power because you can sign a contract that day, which means you have leverage when it comes to negotiations.
It also helps you stick to your budget because you’re only approved for a certain amount. Oftentimes if a salesperson knows that you’re pre approved for a certain amount, they’ll be more willing to help you stick within your price range so they can make the sale.
Stick With Five Years or Less
The standard car loan is five years or 60 months. However, many lenders also offer six and seven-year options. These terms might look appealing when you’re calculating your monthly note but they come with a caveat. Although your monthly note is lower, you’ll be paying more interest over time.
Instead of falling into the trap of trying to get your payment to a manageable level, it’s wise to simply save up a little more to get your 5-year loan within your budget. This keeps you from paying interest and sometimes comes with better rates.
Know Your Credit Score
If you’ve never checked your credit score, it’s time to do so. Your credit score will affect how much banks and lenders will loan you as well as what interest rate they offer you. It’s a big deal when it comes to financing a car.
Check your credit score before you apply for an auto loan to ensure your score is high enough to get favorable loan terms. If it’s too low, then take some time to work on improving it before you finance a car. You can do this by making timely payments on your credit card or clearing existing debts.
Use Cash to Pay for Extras
Similar to how buying a home comes with closing costs, buying a car comes with a lot of extra fees. You’ll need to pay state sales tax and licensing fees, which can amount to a few thousand dollars on top of your ticket price. Save up some cash to pay for these fees so you don’t have to lump that amount into your auto loan.
These are some helpful tips for financing a car the smart way. Follow these guidelines to give yourself the best chance for a smart investment the next time you purchase a car.
