According to the latest government statistics, the average price paid for a new car is around $30,000 in the United States, with a new car loan averaging near $28,000. Buying a car involves a considerable amount of money, so anytime a buyer is looking for a loan, shopping around can really pay off. The process of buying a car fundamentally has two parts: choosing a car, and deciding how to finance the vehicle. Ideally, the process starts with the financing decision, or time spent determining what is actually affordable. Intuitively, it seems most consumers start by deciding on the type (SUV, minivan, sedan, pickup truck), size (large, midsize, compact) and price range (luxury versus standard) of vehicles they'd like to buy, avoiding the financing decision until a later date. This approach can result in loans that don't exactly fit the household's budget.
Shopping for a Car Loan
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If given the time it deserves, shopping for a car loan can take nearly as much research as deciding on the vehicle to purchase. A 48-month car loan of $23,000 at 5.5% costs $535 per month, while the same loan at 7.5% costs $556 per month. Now $21 per month might not seem like a lot of money when spending $30,000 on a car, but it really adds up over the life of the loan. In this example, the excess cost is $1,008 ($21 x 48 months), which might be saved by making a phone call or two.
Online Loans
Leveraging the power and speed of the Internet, many of the traditional automobile financing companies are now offering online loan solutions to their service mix. Applying for a loan over the web is a simple and fast process. That's because many of the manual "back office" functions have been automated. Users should always be familiar with the companies providing this service, avoiding email solicitations from unknown companies. Based on the information entered into the online forms, the lender can quickly conduct a credit check, which sometimes involves running a credit report or checking the applicant's credit score. Based on this information, the lender will determine how much they are willing to offer and the interest rate charged on the loan. Once approved, the lender will send a check that can be taken to the car dealership. In fact, it can be used to buy a car, refinance an existing auto loan, or even buy out a lease.
Predatory Offers
Predatory lending is the practice of charging consumers an excessively high rate of interest for automobile and other loans. This can even happen when visiting a car dealership. These lenders will attempt to charge a much higher interest rate than could be obtained by shopping around. For example, a dealership might refer to this as a dealer "markup."
Don't be pressured into accepting a loan from a dealership or any other financial institution, the best protection against predatory lenders is an informed consumer.
Local Banks and Finance Companies
About 60% of car buyers are considered subprime from a lender's standpoint. Anyone that's had problems making their monthly payments in the past should still seek the help of these traditional lenders. If an account is held with a local bank, stop in the nearest branch office and ask about their interest rates on car loans. This is the type of business these banks want, so their rates should be very competitive.
Car Dealerships
Securing a new car loan at a dealership is probably the most convenient option, and oftentimes the best one too. Dealerships know about special rates offered by car manufacturers. They also have the technology to approve a buyer right on the spot. Be careful when shopping for a loan at a dealership. Sometimes an advertised rate only applies to certain cars, or for loans that are short-term such as 24 months. In addition, dealerships oftentimes "bundle" the deal too tightly. For example, they might talk about the monthly payment, but refuse to explain how much is being paid for the car or the interest rate on the loan. In situations like this, the best option may be to walk away from the deal.
Credit Unions
Most credit unions are not-for-profit organizations. This status provides these lenders with an advantage when writing new car loans. Since credit unions are established to solely provide services to their membership, they only need to cover their operating costs. If the benefit of a credit union is offered at work, these organizations oftentimes provide members with the best possible offer.
Comparing Loans
Consumers should try to get at least three quotes from lenders. The best approach to comparing offers is using the annual percentage rate, or APR, for each lender / loan combination. The APR is a standardized calculation that takes all of the costs of a loan, including fees, into consideration. The federal government has developed strict standards for this measure, and it was developed to help consumers make fair comparisons.
Affordability
This topic is going to be closed out with a quick mention of affordability. In general, there are two rules of thumb that can help consumers to figure out how much they can afford in a new car:
Car Loan Payments: the monthly payment for a car should not be more than 20% of a household's disposable income. That's the money left over after paying for living expenses, a mortgage, monthly utility bills, and credit card payments.
Down Payments: be prepared to make a down payment of at least 10% of the car's purchase price. When a down payment of this size isn't made, lenders might be skeptical about the borrower's ability to pay off the car loan.
Car Loan Calculators
Keep in mind the purpose of buying a new car is for the owner's personal enjoyment and / or that of their family. If someone feels saddled with a new car loan, and it pulls too much money from the other pleasures in life, then it is defeating its purpose. We have nearly a dozen different types of car loan calculators that can help users to figure out exactly how big a bite out of their family budget that new car is going to cost.
About the Author - Finding and Comparing Car Loans
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