Whether you’re buying a brand new car or a used one that is new to you, getting a new set of wheels can be exciting. If financing is involved, however, the process can also be tricky. A wrong move at loan signing time can really cost you, so make sure you keep these four car financing tidbits in mind.
You Can Do Better
Don’t agree to finance your car through the dealer just because it seems easier. According to Consumer Reports, car dealers add an average of 2.47 percentage points to a car loan’s interest rate. This extra interest adds up over the life of the loan can make a car cost you substantially more than it needs to. You may get a better deal if you cut out the middle man and borrow the funds directly from a bank or other lender.
Interest Versus Rebates
Let’s say you found a new Subaru for sale and you’re in love. You want this car and now is the time to buy: the dealership is currently running a special that lets you choose between a discount on the car or 0 percent financing. Financing a car interest-free is a no brainer, right? Not quite.
Sometimes interest-free financing is a good deal. At other times, it’s smarter to take the discount. You’ll have to do the math to find the best choice. If you get approved at a low interest rate, it’s sometimes cheaper to take the discount. Before deciding, ask your lender to show you what the total lifetime cost of your loan would be under each option.
Limit Your Inquiries
Before you begin car shopping, check your credit score and report to eliminate surprises. Even when armed with this knowledge, you could hit a bump in the road and have to apply for a loan through more than one lender. Unfortunately, repeated credit inquiries can lower your overall credit score. To avoid this, limit your loan shopping to 14 days. Any and all hard inquiries made about your credit within a 14-day period count as only one credit check.
Once your auto loan is approved, some car dealers will bend over backward to help you. They’re more than happy to sell you upgrades or try to get you more car for your money, often by extending the length of your loan or maxing out your approved loan amount. Remember, though, that both upgrades and longer loan terms come with a cost. You can save yourself a lot of interest by purchasing upgrade packages with cash rather than financing them. If you can’t do so, ask yourself if you really need leather seats or a sunroof.
Understanding the ins and outs of a car loan is sometimes tricky, but educating yourself a bit before you visit the showroom can save you a lot of money and hassle. If you know financial matters aren’t your forte’, bring a trusted friend along with you to help you navigate your car loan safely.