Getting a new car is always something to be excited about; and with the availability of auto loans, you tend to have more options than if you had to pay the total cost upfront. Understanding the nature of these options is actually your first step to making sure you get something that you can handle in the years to come.
To aid you in your search, first get your finances in order and use a car loan interest calculator to get a solid grasp of what you can afford. Keep in mind that during your search, you’re always likely to find even better financing deals from the automakers themselves; so there’s no need to feel restricted by an offer you might have come across in the beginning stages.
Getting a Grasp of How Car Loans Work
The gist of obtaining and using a car loan is almost exactly like using a credit card. If your credit history checks out, you receive a favorable loan term, and then pay back the principal loan amount along with the accruing interest over a set period of months/years. In essence, you are paying to use the money the lender approves for you.
This is, of course, where the financial calculator comes into play – when used properly, it can lead to lower monthly payments by helping you find a loan with a more favorable annual percentage rate. There’s a significant difference between finding a loan with a rate of 4.5% and a loan with an interest rate of 3%, for the same principal. Over the lifetime of the loan, you could end up paying thousands of dollars more with the higher rate.
Loan Acquired; Is the Car Yours Now?
The short answer is no – the car is not yours yet. In reality, even though you’re paying all the maintenance fees and gas, the lender owns your car for the duration of the loan until the principal is repaid. The lender is, in essence, letting you borrow his vehicle at a small price (the interest). This is why failure to pay the interest can lead to a repossession under the law. You must factor the cost of the insurance you’ll have to buy into the total price you’ll be paying, since the lender requires this but isn’t responsible for providing it.
Watch Out for Car Loan Terms
More than anything else, beware of how superficially attractive a long loan term is. Time and again, we see people fall for the long, 6-8 year loan terms that are becoming more and more popular for luxury vehicles in recent years. Although your monthly interest rate is lower, this almost never justifies the significantly greater overall amount you’ll still be paying on an outdated vehicle several years from now. The car itself is rarely worth the total cost in such cases.
The Importance of Your Credit Score
Finally, you’ll see how your FICO score helps you. Although it isn’t the only credit-related information a lender takes into account – it is certainly one of the most important. They will use it to determine the risk involved in loaning you the money you’ll need to finance the vehicle; the higher the risk (as determined by the details of your account), the more they’ll need you to pay to make up up for the risk they’re taking. Risk, in essence, is costly, and can lead to a higher down payment amount for people with relatively poor credit scores. Generally speaking, a score of about 720 or higher is considered excellent in terms of securing the best loan rates available to the general public.