Applying for a Car Loan? Here’s How to Lower Your Auto Costs

applying for a car loanAmericans love their automobiles and are willing to use financing in record amounts to acquire them. Roughly 85% of Americans who purchased a new car in the last six months used financing, either a lease or a car loan. Buying a car is typically the second largest purchase behind a home for most people and costs the average American over $500 per month in car payments.  Below are several things to consider before applying for a car loan.

Budget for Transportation Costs

Your budget is the key to deciding how much money you will have to borrow. First and foremost, you will have to figure out how much money you are comfortable paying each month. This can be easily achieved by using a car payment estimator. It will not only show you how much you will be repaying every month but also for how long.  Extending the term will increase the overall cost so you will want to carefully weigh the necessity of the added finance cost versus the type of vehicle you intend to purchase. In addition, don't forget to budget for maintenance and repair, $100 is a good starting average, registration/parking/tolls, and monthly fuel costs. It's these additional costs that many car buyers forget to include that can quickly cause you to exceed your ability to pay for these expenses.

Interest Rates

When you are applying for a car loan, the dealer or bank will check your credit and payment history and use this information in determining the type of financing and interest rate you will qualify for.  The higher your FICO credit score the lower your interest rate and the lower your overall loan cost.

It's always a good idea to pull your credit report prior to making a large purchase like an automobile and fix any errors before applying for a car loan or other credit. Talk to your banker and check with your local credit union about current auto loan rates prior to shopping for a new car. The more prepared you are the more likely you are to get a better deal.

Repayment Period

The repayment period will obviously have a major impact on the amount of your monthly car loan payment and the overall cost of your purchase. No rocket science here! Extend the term and you lower your monthly payment however, you will also end up paying more in interest and possibly other costs as well.

One trick that car salesmen will use to force you into a more expensive vehicle is to ask you what you want to spend per month on your new vehicle. Don't fall for this trap! Simply tell the salesperson that you want to keep your monthly payment to a minimum. This will drive them nuts but you must not give away anything that will weaken your ability to negotiate your costs.

Down Payment

A down payment is simply the amount of money that you will pay the dealer from your own funds towards the cost of the vehicle. Remember the cost of the vehicle is basically whatever the dealer wants it to be. Car dealers can be very creative in arriving at the total cost of a vehicle so you need to do your research before arriving at a car showroom.  I recommend using Consumer Reports to pull a dealer invoice for the specific car you wish to buy. I have done this and it takes the gamesmanship out of the whole process. To get around this, dealer's can get “rebates” and other incentives from car manufacturers so you will want to take this into account before making any offers.

Again, this is not rocket science here folks.  The more money you put down, the lower your financed cost will be.

Final Thoughts

My advice would be to buy a quality used car that is 2-3 years old and has a repair history available. If the owner balks at showing you the service history on the vehicle walk away.

If you are buying a new vehicle, get your credit in shape before car shopping, create a detailed budget for all car related expenses, pull the dealer invoice,  and be prepared to negotiate hard for the best deal.

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