Six Steps to the Best Auto Deal
Last year over 73 million people purchased vehicles. For many, the vehicle is a necessity. We need reliable transportation to get to and from work, school, the grocery store and medical appointments. However, financing a car or truck can be tricky and it can quickly become a financial burden if you do not know how to protect yourself from getting stuck in a loan you cannot afford. Here are six ways you can protect yourself:
1. Be Prepared Before You Shop for an Auto Loan
You can’t always plan the timing of purchasing a new or used vehicle, but you can take steps to prepare. Not being prepared can potentially cost you hundreds or thousands of dollars over the life of the loan. Check your credit score before shopping for an auto loan and make sure your credit report doesn’t have any errors, so you can negotiate the best rate. You may be able to take some steps that will help you raise your score in a relatively short period of time. A better score will secure a lower interest rate and reduce the amount of money that you end up paying. You can learn more about your credit reports and scores in our online course, Understanding Credit Reports and Scores.
2. Review the Values of the Autos That You Are Considering
Use sites such as Kelley Blue Book (www.kbb.com) or the National Automobile Dealers Association (www.nadaguides.com) to learn about the values of cars you are considering. If you are trading in a vehicle, review the trade-in and resale values of those vehicles, too. Sometimes, it may be more cost effective to sell a car yourself and use the cash as a down payment on an updated vehicle.
3. Know What You Can Negotiate
If you are taking out a loan for a vehicle, compare the total cost of different financing options. Just like you can negotiate the price of the vehicle, you can also negotiate your loan terms. You can negotiate for a better interest rate, how long you will be paying the loan, whether you buy optional add-ons and the price of add-ons, as well as some dealer fees. Bring a worksheet with you so you can compare these costs. For information on dealer financing versus bank financing see our blog, Auto Loan: Bank or Dealership
4. Avoid Long-Term Loans If You Can
When comparing your offers and negotiating a loan, it’s important to know if you can afford the monthly payment. You also need to be sure you look at the total cost of the loan. A smaller monthly payment may mean the loan is extended over a longer period of time – 60 months, 72 months, or more, instead of 36 or 48 months. If your income or job is not secure, having an extended loan is a risk as you could lose the ability to make monthly payments in the future. For older vehicles, a longer loan could be a problem if the life of the loan is longer than the expected life of the vehicle. For example, in the chart below, you can see how a lower monthly payment increases your total interest cost. The chart assumes a $20,000 loan and an interest rate of 4.75 percent.
5. Review Your Loan Contract Before Signing
Before you sign your new loan contract, make sure everything matches what you agreed to during the negotiation. Consider having a friend or partner help you review all of the paperwork before signing the loan documents. Lenders are required, under the federal Truth in Lending Act (TILA), to give you written disclosures about important terms before you’re responsible for the loan. Read that information before you sign the contract and drive away. Check the Annual Percentage Rate (APR), the amount financed, the finance charge, and the total of all your payments. Some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This could put the loan that you thought you had at risk. Before you drive away, make sure you and the lender have both signed all of the paperwork and that you have copies of each document.
6. Be Prepared for Your Family Too
Often, people are asked to be a co-signer for an auto loan. You may be one of many people who want to help a family member or friend but remember that being a cosigner will put you on the hook for monthly payments if the other borrower stops paying the loan. Be sure this is a payment you can afford to make, before signing on the dotted line.
Buying a vehicle is a long term financial commitment. We hope this article provides some ideas about how you can protect your money in this important transaction. Be sure to check out the Resources section of our website where you will find a car cost comparison calculator and numerous blogs on managing your credit and your money.
Compiled in part with information from the Consumer Financial Protection Bureau.
Published Mar 19, 2018.