There are two ways to get into a car. Pay all cash or finance it with a loan. You can also lease a car and eventually buy it if the lease contract has an option to do so.
What alternative is better than that?
Because cars depreciate – lost their real value – very quickly, buying in cash is usually the best option. And if you’re looking to buy a beater that’s just going to get you from point A to point B, cash can be your only option.
Lenders typically have limits on the age or mileage of used cars they ‘re going to finance. So if you’re looking at $2,000 of high-mileage options, you ‘re going to have to plan to save money. Thankfully, since the price level is so much smaller, you don’t have to pay too much.
But what if you want a newer vehicle or need it? You may not want to pay $30,000 for a brand new model. But if you want your car to last a few years, investing in a newer, lower-mileage option up front can be a wise decision.
In this situation, it’s also a smart thing to save money if necessary. Those monthly car payments can be eaten into your budget quickly. With that said, most of the Americans who drive do finance their vehicles.
Perhaps, earlier rather than later, you need a ride. And it’s all right to invest if you get it correctly. Yet while you’re investing, take the five ideas that we’re going to tackle:
- Keep the credit in sequence.
- Put as much of the money down as you can.
- Okay, consider the estimate.
- Shop around for the perfect price on funding.
- Plan to save more cash on your next vehicle.
- Get your credit for the order
It’s important to keep your credit in order before you start shopping for a car. We’ve written extensively on how to do this, so in a second, we ‘re going to steer you to some other options.
But, first of all, let ‘s understand why this is so important. For better credit, you ‘re going to apply for better funding. This means you’re going to get a lower interest rate. And that could save you tons of money over the life of your auto loan.
Let’s say you’re planning a $10,000 car loan. With a score of 630, you can qualify for 7% APR at today’s rates. For a score of 700, you will apply for a 4 percent APR. (Note that these are all off-the-cuff definitions to give you the math.) You ‘re expecting a four-year term.
According to our loan payment calculator, you ‘re going to pay about $239 per month with the higher APR. With the lower APR, the contributions are going to be $225 a month. Plus, you ‘re going to pay a lot less interest over the life of the loan.
As you can see, it’s worth taking time to get your credit score in order, if at all possible. Here are some steps you can take to do this:
- First, get a copy of your score so that you know where you stand.
- Next, correct any mistakes on your credit report.
- So, make all your transfers out of here on schedule.
- Consider asking for adjustments of goodwill to existing missed payments.
- Pay off your credit cards to increase your credit usage levels.
As you work on improving your credit score, start sowing as much money as you can for your down payment.
Put as many down as you can
Just like when you buy a home, when you buy a car, you ‘re going to put your money down. That is the cash you paid so you can bring in for the buying of a vehicle. It reduces the total amount of funding you ‘re going to need. And it’s a good idea to have a high down payment whenever possible.
There are a few major reasons for this: depreciation and interest costs.
First of all, let ‘s talk about depreciation. Since cars are exposed to a lot of wear and tear, they lose their worth very easily.
This is particularly true of newer automobiles. For example, this infographic from Edmunds shows that as soon as you leave the lot, a brand new car loses about nine percent of its original value! After one year, the car will lose about 19 percent of its value, and after just two years, it will lose 31 percent of its value.
Actual depreciation rates differ by type and build. Cars that continue to last longer would have a higher rating. Yet, still, the average vehicle is just 37% of what you paid for at the dealership five years after your purchase.
So, what does that mean for a car buyer? It means you can get yourself into the upside down loan really fast.
The upside down loan is when you owe more money to a piece of property than it is worth. Say you’re going to fund 100 percent of a new car for $30,000. You decide to sell it a year later to get something else. It’s only worth $24,300 now. If you don’t put any money down, you potentially owe the bank more than the worth of the car. Yeah, obviously, you’ve got to pay the bank money before you can sell the car.
It’s not a good financial place to be in. It really restricts your ability to make choices when you purchase your car in the future.
Fortunately, you can minimize these consequences by making a reasonable down payment on the car. If you’re buying a used car, it’s prudent to set down 10% of the vehicle’s selling price. If you’re buying something new, bump that down payment up to 20%.
These down payment amounts will keep you ahead of depreciation, so you’ll never end up on your loan. Of course, the larger your down payment, the smaller your down payment. That means reduced mortgage costs, less debt over time, and an much less risk that you’re going to finish upside down on your loan.
Understand the budget
Your spending would have a significant effect on how much car you will afford. And there are two parts to this puzzle: the overall auto loan and the monthly payments.
First, you need to look at how much you can afford to spend a month on car payments. This means looking at your current budget and determining how much you can comfortably allocate for this expense.
Potential borrowers are always going to have an view here. For the most part, borrowers don’t expect you to spend more than a portion – or a little less – to your mortgage income. So if you have a lot of credit card debt or an expensive mortgage payment, you may be more limited in your monthly car payment.
You’ll still want to know how much overall debt you ‘re able to pay off. If you’re working to stay debt-free, less is better off. Really, less debt is almost always better.
Irrespective of these figures, you ‘re going to want to put strict limits on both the monthly contribution and the overall amount of debt you ‘re considering. This is going to help you stay in control when you’re in a lot with a dealer who’s trying to upsell you.
Shop around for funding
Many first-time buyers are tempted to go to a dealer and take whatever funding they offer. But this isn’t a good idea, though. For one thing, the financing of dealers tends to have less favorable terms. And if you take time to shop around, you’ll get a better deal.
To do this, you just need to get a pre-qualified auto loan with two or three different lenders. It’s also a smart idea to consult with a bank or credit union of your own. And if you’re not a member of a credit union, you might just become a self-financing one. They tend to offer the best terms, and they are more likely to work with you if you don’t have excellent credit. When you have decent ratings, you might also find out more opportunities for lending platforms like Lending Club or Prosper.
The key is to compare terms from a few different lenders so that you get the best deal possible. You are eligible for a loan with little, if any, payments and the lowest possible interest rate. You might also ask about different terms of the loan. Often a shorter period coincides with a reduced interest rate, and the price will not be too much higher.
And don’t worry, shopping around will negatively affect your credit score. Putting too many credit applications will render your score. But scoring algorithms like FICO allow you time to shop around for large loans like this.
FICO will give you between 14 and 45 days to shop around. All your requests for the same type of loan within that period will be treated as a single inquiry. It’s a good thing! Since you don’t know which scoring model a potential lender is going to pull, it’s best to stick to the 14-day rule. Do all your pre-qualification shopping within two weeks of your purchase of your car.
As you’re shopping around, your goal is to find the best funding deal you can get. It’s a good idea to ask for funding that matches your maximum car purchase budget. If you end up in a cheaper vehicle, all the better.
Having a pre-approved loan makes it easier for you to negotiate, whether with a dealership or an individual. The person you ‘re dealing with knows that you have funding in place, and they’re going to see you as a legitimate prospective buyer.
If you have been pre-approved, you will receive an bid message from the lender. This could be in the form of a blank check with a limit set, a certificate, or a letter. You ‘re likely to get a code to activate your loan online these days.
This doesn’t mean you’re going to use the money. It just means there’s money available.
Intend to save money for the next time
When we’re dreaming about owning your first car, let’s think how to make the experience even easier next time. If possible, you should try to have only one car loan in your life. After this first ride, you will use your car’s equity and any money you’ve saved to pay cash on the next ride.
To do so, consider making more space in your budget so you can save money for your next ride. For eg, tell me that you can happily afford a $300 / month car payment. Instead of taking up the full amount, try to pay $225 per month. Then save an extra $75 a month. Just consider that part of the payment for your car.
It doesn’t seem like a lot of it. But let’s say that your car loan will be paid off in three years. You ‘re going to have some equity in your car, plus $2,700 saved for your next vehicle. After your car is paid off, you can save the entire $300 per month you’ve spent on a car. At the end of the time, you ‘re going to have $6,300 in cash and your car’s equity. And you’re going to switch into your next vehicle completely debt-free!