Auto Loan

When shopping for an auto loan, your number one concern (after the car you want, that is) should be obtaining a copy of your credit report. Lenders carefully examine your credit history to determine whether or not lending you money is a risk worth taking.

National credit bureaus can provide you with a copy of your credit report. Usually, there is a slight charge for obtaining this report; however, if you applied for a loan and were turned down, you are entitled to a free copy of your credit report provided that you request a copy in writing within 30 days of the rejection. Be sure to include a copy of the declined loan application with your written report. Other situations in which you may obtain a free credit report include:

• Unemployment
• Applying for jobs
• On welfare assistance
• Fraud victim

Most new vehicles are financed. There are different options as to how to pay for your car:

• Pay cash
• Get an auto loan from a bank, credit union or other financial institution
• Financing from the dealer or auto manufacturer
• Home equity loan

Typically, option #2 will offer the lowest rates. In general, option #3 will cost you more, though it’s always possible to negotiate. You just have to shop around and look at different deals first. This can be a bit of a migraine, but it’s worth the trouble.

If you go with option #4, a home equity loan, you will get a good interest rate. As well, your payments will be tax-deductible. However, you must first ensure that a home equity loan will not place you in danger of losing your home!

Many car-shoppers ask themselves the question, “New or used?” Keep in mind that interest rates on new cars are lower than on used vehicles. And, for the most part, new cars can be financed over longer periods of time than used cars. This means that, in the long run, a new car can actually be cheaper than a used car.

Be sure to weigh your options carefully before deciding how to go about financing your car. Many people become charmed by a low down payment (the amount of money you pay up front). However, it is important to consider the whole picture. For example, what will the interest rates you pay be like? What is the length of your loan? These factors will combine to determine how sweet a deal you’re really getting.

The longer the term of the loan, the lower the monthly amount you’ll pay. So, in spite of the low monthly amount you’ll pay, you’ll end up paying more in the long run if you go with this option. Longer loans take more time to generate equity -- that is, for the car to be worth more than the amount you owe on it. With a long loan, then, quite some time will pass before you can re-sell the vehicle and cancel out the loan.

When finalizing an auto loan, be sure to read and understand each and every word of each and every document you sign. If you don’t understand, ask. If you still don’t understand, don’t sign until you do. Too many people fall victim to unmanageable loans simply because they didn’t read the fine print of their auto loan contracts. Don’t let this be you.

When signing the contract, ensure that whoever signs on behalf of the auto dealership is authorized to do so. Sure, the salesperson might have been cute, charming, funny and helpful, but their signature on your contract is worth nothing if the dealership has not empowered them to sign on its behalf. In some cases, you may need to get a manager or other dealership higher-up to close the deal.

Once all documents have been (legitimately!) signed, be sure to obtain a copy of every single paper on which your signature appears.

You may be tempted by “special deals” offered by some dealerships. These deals are usually geared at first-time buyers, senior citizens or people with not-perfect credit ratings. Use logic here: a car dealership is a business, and when do businesses do anything for the sole purpose of being nice? Never. Any “deal” a dealership is offering comes with a price that benefits the business. In the case of auto loans, this usually translates into large down payments and high interest rates. If you can pay the loan off quickly, this kind of deal might work for you. If not, and you end up having to re-sell the car before you’ve paid off the loan, or if you need to write it off in a car accident, you may end up owing more than the car is actually worth.

The bottom line is, show up at the dealership prepared. Remember that salespeople work on commission, and want your money—even the kindest, most helpful ones. If they sense that you don’t know your stuff, they’ll use it to their advantage.

Questions to ask about your Auto Loan

Getting an auto loan is not a robotic process. You must be an active participant, asking lots of questions to make sure you know all the terms and conditions of your loan. Below is a list of questions you MUST ask to ensure you’re getting the best deal possible.

1) What’s the interest rate I’m actually paying?

2) What are the possible penalties in my loan?

3) What should I do with my old vehicle?

4) How much does the car cost?

5) What is the deposit like?

6) Should I buy a service contract?

7) Can I return the car if I’m not satisfied with it, or with the deal?

8) What about credit insurance?

The best way to understand what interest you’re paying is to look at the annual percentage rate (APR). The APR is the actual interest rate you pay annually on the unpaid balance of the loan, and is the best way to understand the interest you are paying. The rate you are offered will to a large extent depend on your credit score, a number that your credit report will reveal to dealers.

What are the possible penalties in my loan?

Be sure to inform yourself of “hidden charges,” which are basically penalties. Does paying the loan off early lead to penalties? Are there any other potential extra charges that could arise during the course of my loan?

What should I do with my old vehicle?

The value of your vehicle will depend strictly on the market. If you’re trading in your old vehicle, avoid talking about a trade-in price until you’ve settled on a price for the new car. The trade in is an aspect of the dealing procedure; don't hesitate to use it to the full extent. The dealer may offer a good price to you, but then get some of his money back on the financing of your new vehicle. Be sure you understand how your trade-in money is being used in the financing. If you don’t, this money might never go towards lowering your new car payments.

If you sell your old vehicle privately, you might get more money, but the sale can be more of a migraine. Do your research and check classifieds to find out a reasonable asking price.

How much does the car cost?

Think of it this way: the sticker price is just a suggestion. Don’t be afraid to bargain, or haggle, the price down. Some dealers are willing to bargain on their profit margin, usually in the ballpark of 10 and 20 percent. Typically, this number is the difference between the manufacturer's suggested retail price (MSRP) and the invoice price.

Compare the car you’re considering buying to others. This way, you’ll have a good idea of what the car is actually worth, and will know right away if you’re being ripped off.

What about the deposit?

Before you shell out a deposit on a vehicle, make sure you know whether or not you can get the money back if you are unsatisfied, or if you change your mind. Be sure to get the salesman’s answer IN WRITING (oral contracts mean nothing here!) before you give out any money.

Should I buy a service contract?

Read the contract in detail, then check out what the warranties and insurance policies cover. Will you likely need to use the service contract? Does the contract cover unlikely circumstances, or everyday circumstances that you could afford on your own anyway?

Unfortunately, a car is not the same as a new sweater or CD—you can’t take it back. That’s why it’s so important to test the car and really thoroughly analyze the deal. The odd dealer will allow you to return the car, but be sure to get this in writing before you take off with the car.

What about credit insurance?

Your lender may suggest, or even insist upon, credit insurance. Before you agree to this, research precisely how much it will cost you. You might have an existing insurance policy that covers exactly what the credit insurance will cover. If so, thoroughly weigh the options of going with your existing coverage or new credit insurance. Federal law does not require credit insurance; some states might. If payment is mandatory, make sure it is included in the cost of your credit and see how it shows up in your APR.

Finally, before you sign an auto loan, make sure you know the following:

• exact price you’re paying for the vehicle
• total amount being financed
• total amount you’re paying for the credit
• annual percentage rate (APR)
• exact amount of each payment
• total number of payments required