How to Effectively Finance your Automobile

  • wpadmin
  • February 22, 2017
  • Auto Finance
  • Comments Off on How to Effectively Finance your Automobile

You are really looking to buying a car, only to be turned down by the lenders you had counted on to give offer you an auto loan. But you can still go on, do a bit of shopping at your neighborhood and buy a car from an auto dealer there, especially if you have a few savings with you. This may not be the best choice, or the ultimate solution, but it will get you a car anyway.

And what happens if you don’t have any traditional credit history, or not enough to calculate a credit score (referred to in the biz as a “thin file”)? Well, you’re SOL at the typical auto dealer. You can’t buy a car if you can’t get a loan, which leaves you historically with only one choice: Stop by your neighborhood “Buy Here Pay Here” (BHPH) auto dealer, and one way or another, they’ll probably get you into a car.

It won’t be a new car, and it will have lots of miles on it, and it may need a new transmission the day after you drive it off the lot, but at least you’ll get a car you desperately need to get you to and fro.

The BHPH dealer won’t want to talk to you about interest rates. What’s to negotiate? The interest rates can legally go as high as 36 percent. (Where I live in Georgia, the maximum interest rate allowed is only 28 percent). Instead, your local BHPH will focus on your expected monthly payment and ask for a really big down payment. It’s a terrible way to buy a car, but for millions of Americans, it is the only way they can make this significant a purchase.

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Students, and to be more specific college students, are usually in more urge to buy a car that they tend to go to the extremes to get one. Some even end up taking a student loan a using it to finance buying an auto. This is one of the major mistakes you can make in auto financing. Do not be pushed by any force whatsoever to the extent of buying a car with a student loan, this will haunt you for long with a huge debt in the future.

Getting the student loan was easy because it was a familiar process for me. I had stood by as my parents completed the paperwork for my first few student loans and the process did not seem that complicated. I did some searching online, had a chat with my school’s financial aid office and one signed promissory note later I had another student loan—except this one was for a car and not tuition.

Interest rates, terms and the devaluation of your auto are important factors that make all the difference between student loans and car loans.

There’s a reason car loan terms are less than 10 years: A car loses value over time. My vehicle, unlike the student loan, would be losing value while my interest continued accruing. At the same time, I would be paying for maintenance and repairs, ultimately adding to the overall investment in the car

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When many people are out to finance an auto, many of them find it hard avoiding the potholes along the way and end up making mistakes which take a toll on them eventually. Car dealers are so canning and manipulating; do not let them snare you, shop around, and avoid any loan going for more than 36 months.

Playing the “purchase price” versus “monthly payment” game

Dealerships have a lot of maneuverability when it comes to shifting loans out from what used to be a traditional three-year loan to five, six, or even seven years in order to make monthly payments come down into a range that makes consumers comfortable. Unfortunately, as points out, a $25,000 car with a five-year loan and a $16,000 car with a three-year loan may have the same monthly payment, but you’ll end up paying about $2,500 more in interest for the more expensive car with the longer loan terms. Plus, playing into the monthly payment game gives you little flexibility on lowering the final purchase price.

Not shopping around for the best financing rate prior to your purchase

The problem with relying solely on dealer financing is dealerships can manipulate loan rates and loan length as they see fit to each customers’ individual situation. In other words, if the dealership realizes you haven’t done your homework by looking elsewhere for loans, they’ll still use your credit score to determine your overall lending rate, but it’ll almost always be a higher loan rate or less favorable terms than if you were to shop around at your local bank or credit union.

Financing any loan longer than 36 months

The problem with loans that are longer than 36 months is that vehicles begin to depreciate heavily after the third year, based on their age and the amount of miles driven on average per year. Add cumulative interest paid on the loan into that depreciation and any financing beyond the three-year mark really doesn’t make much sense.

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