Buying a car can be a hassle, and auto loans may only complicate the situation further. However, this doesn’t have to be the case if you plan ahead and know what you’re getting yourself into beforehand. Here are some examples of some things to consider before getting an auto loan.
Look at the total cost of the loan
When looking at loans you need to look beyond just the monthly price. A low monthly payment can draw you in, but the financial institution may increase the total amount of the loan through things such as higher interest rates. For example, it may be cheaper, in the long run, to pay more monthly and have a shorter loan term rather than stretching the payments out and accumulating more interest. Make sure your monthly payments are affordable but do not solely base your loan decision on a low monthly payment.
Learn your eligibility
You should know ahead of time what loans you qualify for, especially if you plan to finance your vehicle through a dealership. Be familiar with your credit score and what financing you realistically qualify for. Dealerships often offer loans through preferred institutions, but these loans will typically have higher interest rates. The dealership may also attempt to claim that you qualify for less. Not being familiar with your own financial eligibility can lead to being roped into a loan that is more than you want to pay.
Research interest rates
Always be sure to look into the interest rate of a loan before you sign the dotted line. An interest rate is basically extra money you will have to pay, so the lower the interest rate the better. For example, a 5-year loan of $5,000 with a 4.5% interest rate will actually cost a total of $5,593. When checking how much money you can get a loan, be sure you will be able to pay the entire amount, interest included.
Consider the length of the loan
A loan is a long-term investment, and you are responsible for paying the loan out even if you don’t have your car for the entire payment process. While low monthly payments can be enticing, being shackled to those payments for ten years instead of five will not only be a longer investment than you hoped for but can also result in you paying more interest on the loan. Using the 5-year loan example mentioned before, if the loan were a 10-year loan instead, then the total would be closer to $6,218 rather than $5,593.
Only finance what you can afford
Make sure you can afford the monthly payments. While you shouldn’t let low monthly payments fuel your loan decision, choosing a loan with higher payments than you can realistically afford is even worse. While the total amount paid may end up being less because of the interest rate and loan length, not being able to make the payments each month will put you in an even worse situation. Not only could your car be repossessed, but your credit score will suffer as well.
Photo: Thinkstock/RidofranzPosted on May 22, 2023