What to Focus on When Obtaining an Auto Loan

When attaining a car loan, most buyers tend to focus solely on the purchase price, and not necessarily the overall conditions of the loan. But getting the right car loan is just as important as the number value in which you’ll pay.

“The big mistakes are made in the financing office,” says Phil Reed, the senior consumer advice editor at Edmunds.com. “Making the right decisions can save thousands over the life of the loan.”

new-car-webWhen obtaining an auto loan, you must make a monthly payment, which varies based on how much you put down, the length of the loan and the loan’s interest rate. So to lower your monthly payment, you must upgrade either the money you put down, lengthen the loan’s term and find financing with a lower interest rate. Making small modifications on these factors can significantly impact your monthly payment.

For example, take a vehicle that costs $26,195. Here are several loan options to consider that will impact your monthly payment:

  • Loan Option #1: Zero down, 60-month financing, 5 percent APR = $494.33 per month
  • Loan Option #2: $2,500 down, 60-month financing, 5 percent APR = $447.15 per month
  • Loan Option #3: $2,500 down, 60-month financing, 6 percent APR = $458.09 per month
  • Loan Option #4: $2,500 down, 72-month financing, 6 percent APR = $392.69 per month

As you can see, monthly payments vary significantly with different down payments, loan terms and interest rates.

However, you also don’t want to go to a dealership and announce the exact monthly payment amount that you’re willing to bestow each month. That mistake may cause car dealers to use the longest auto loan term available to figure out your potential rates for monthly installments. For example, a car that costs $25,000 with a five-year loan may require the same monthly payments as a $16,000 car with a three-year loan — but you’ll end up paying more in interest for the higher-priced vehicle. Sometimes, if the car salesperson knows how much you can afford per month, negotiating a lower purchase price may be harder to do. One way to avoid this is to not tell the seller how much you can afford per month.

It’s also important to note that lenders aren’t obligated to offer you the best possible rate for which you qualify. In general, new cars typically have lower interest rates offered compared to used cars with a higher rate, and in 2007, car dealers marked up loans by an average of 1.8 percent on used cars and 0.6 percent on new ones. To avoid overpaying on your loan, inform the lender that you’re looking in various places for your vehicle or already have another offer. That may help you get a better rate.

When you finally do decide on your auto loan, it’s important to check to see if it all works out. Do the math: If the monthly payment differs even a little bit from your calculations, the loan might not have the terms you think you negotiated.

If you’re looking to purchase a vehicle and are in need of an auto loan, contact us today to see how we can help you.


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