Buying a car is a massive purchase for most people. Other than your home, it’s likely the most expensive piece of property you’ll ever finance.
But unlike your home, your car is not a true investment. Your car will depreciate the second you drive it off the lot.For this reason alone, it’s not smart to pay interest on a car loan. However, most buyers need a loan to buy a car. The team at Broussard Poché, LLP offers these tips to help make the car buying experience less money draining.
- Understand Your Credit Score
You must know your credit score and history before heading to the dealership. Here’s why, unlike mortgages or a credit card, you can usually get a car loan even if you have pretty bad credit, but you will pay for it. If your score is poor the dealership will find a high-interest loan. They know, and so do the banks, that repossessing a car is not a big undertaking. Institutions will lend money for cars because they will come out on top even if you don’t pay up.
Once you know your credit score, you can figure out if you qualify for the best car loan rates. A great score is 750 or better. Buyers with credit scores in the low 700s can still get a good interest rate but may not qualify for the best promotions. Borrowers with below average credit scores, under 650, will be charged high interest.
- Keep the Term Short
Shorter loan terms come with lower interest rates but higher monthly payments. It sounds daunting, but that’s what you want. A car sales rep can show you lower and lower payments by extending the term of your loan. However, they are not reducing the price of the car. While the monthly payment may fall from $500 to $375, you’ll be paying much more in interest. Also, banks will usually charge higher interest rates for longer loans, further increasing your cost of credit.
- Put 20% Down
Putting down as much as you can up front will help you from owning more than your car is worth in the long term. 20 percent is a safe bet. Driving off in your new car without putting a penny down is tempting, but it’s risky. If you find yourself suddenly needing to sell your new car, you may not be able to if you owe more on the loan than the car is worth.
- Pay Tax, Title and License in Cash
Do not finance the other up-front expenses involved in your vehicle purchase. Often, dealers will offer to roll some or all of these fees into your financing. However, if you do roll over these expenses, you will be upside down on your car loan from the start. You’ll be increasing the amount of your loan but not the value of the car.
It would be ideal to not have to take out a loan to buy your new vehicle, but life rarely works that way. If you are looking at buying a car for a new driver in your home, consider saving together with your teenager and buying a “new used” car in cash.