Shopping for Car Loans
The best strategy is to drive the best car—new or used—that you
can afford to buy for cash.
Simply said, paying interest to buy a depreciating asset means you’re
losing money two ways: in the interest and in the lost asset value. You
should borrow as little as possible for the shortest period of time you
can afford.
But most people need to finance their car purchases—the things just
cost too much. So, keep in mind that the best approach to financing a car
purchase is different than financing real estate:
- When you’re buying a house, the best strategy is usually to borrow
as much money as you can afford to buy the most house you can. This means
making the smallest down payment that you can.
- When you’re buying a car, the best strategy is usually to borrow
as little as you have to in order to get least-expensive car that fits your
needs. This, effectively, means making the largest down payment you can.
While you can get a loan for a vehicle through the dealership that sells
it, you should compare the interest rates and terms available through banks,
on-line lenders and credit unions, too.
But don’t mention financing when you’re negotiating the price
of a vehicle. Keep the initial talks focused solely on the total cost of
the car or truck. (Likewise, mention trade-ins later—after you’ve
finished negotiating the vehicle’s purchase price.)
The biggest decision, when you’re shopping for an auto loan, is the
length of the loan. Most auto loans today require from 36 to 60 months worth
of payments. In other words, they’re three-, four- or five-year loans.
(You’ll also find some two- and six-year loans; but they are less common.)
Just as with a home loan, the longer the term of an auto loan, the lower
your monthly payment—but the higher the total amount of interest you’ll
have to pay.
If you have a tendency to trade-in or sell your cars every two or three years,
you should rethink your priorities. But, if driving a new car so often is
important to you, avoid the longer-term loans and their low payments. You
may owe more than your vehicle is worth if you try to sell it after two years
and you have a five- or six-year loan.
Interest rates are usually higher on used car loans than on loans for new
vehicles. This and other factors actually can make it cheaper for you to
finance a new vehicle. An exception: so-called “certified, pre-owned”
programs which sell high-quality used cars on terms very close to those
of new cars.
When you’re comparison shopping for your loan, you also may want to
have it quoted with several different down payments. A higher down payment
will reduce your monthly payments, and it also may reduce the interest rate
on your loan.
However, you may find that the difference in monthly payments between a $1,500
down payment and a $3,000 down payment is insignificant over the course of
a five-year loan, in which case it probably pays to hold onto your money for
now.
Next: Conclusion
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