We all need reliable, affordable transportation. For many of us, an auto loan is essential when it’s time to buy our next new or used vehicle. The type of financing you choose and the lender you turn to for your loan is a bigger deal than you might think.
Over your lifetime, you’ll probably own many different vehicles. You will likely spend more money on these vehicles and related expenses than you’ll spend on your home. In fact, an AAA study suggests you’ll spend between $6,000 and $9,000 per year on fuel, maintenance, repairs, insurance, fees, depreciation, and interest. That’s a lot of money.
It’s best to save where you can, starting with your financing. By getting a low-cost loan, you’ll save hundreds—if not thousands—of dollars over time.
Auto loans vary based on a several factors: whether you’re buying new or used, your credit score, the size of your down payment, and the term you select. But they all work in basically the same way. A financial institution lends you money to buy your car. You repay the loan’s principal and interest in monthly installments, and at the end of the loan’s term (typically two to seven years), you own the car, free and clear.
Because your vehicle serves as the collateral for the loan, lenders typically offer a more affordable rate than they would for an unsecured loan (which represents a higher risk for them).
Along with insurance and maintenance expenses, the interest you’ll pay on your auto loan is a major factor in the overall cost of your vehicle and should be considered as you plan your purchase. As you research auto loans and lenders’ advertised rates, it may appear that interest expenses won’t add too significantly to your monthly payment. But over time, it adds up.
Let’s say you want to borrow $30,000 for a new car and pay it back over five years (60 months). Lender A offers you its best rate of 3.5% APR, and Lender B offers its best rate of 4.5% APR. Lender B’s monthly loan payment will only be $13 higher. Not a big difference, right?
Over the life of your loan, you’ll end up paying $780 more to Lender B.
That money could be spent on gas or added to your savings. Our online calculator will help you compare financing offers and avoid overpaying.
Among the best car buying tips is “let the buyer beware.” While most car dealerships are run honestly and professionally, a few may resort to high-pressure sales tactics, a complicated negotiation process, and “dealer add-ons” designed to pad their profits. Even if you’ve explained that that you need a day or two to consider your options, an aggressive salesperson may try to pressure you into signing on the dotted line today.
This is a big purchase for you, so be careful to avoid any rush decisions you might regret.
Fortunately, it’s possible to take more control over the buying and financing process. Here are three ways to reduce the stress associated with – and avoid overpaying for your next automobile: