The Car Loan Survival Guide
It’s often preferable to buy a newer car, with a factory warranty, rather than shelling out cash for an older car. An older car may cost you more in the long run; for example, you may have to pay more for:
- Unscheduled parts and repairs
- Petrol for a car with worse fuel consumption than a newer model
- Insurance on a car with fewer safety features.
That’s not to mention the peace of mind that comes from having a newer vehicle and knowing it will get you where you need to go with no drama.
Most people don’t have thousands of dollars tucked away in a savings account to buy their next vehicle, so sometimes they need to consider whether it is necessary to take out a car loan.
A car loan is not the end of the world, however, especially if you don’t have a lot of other debt. Keep these factors in mind when you shop around for both the car of your dreams and the loan to pay for it.
Watch your debt-to-income ratio
Your debt-to-income ratio is just that – the ratio of your minimum monthly payments on all your debt, not counting your mortgage, compared to your income. Experts recommend keeping this figure as low as you can. If a car loan would put you over that magic number, it could jeopardize your chances to get a mortgage, home equity loan or other credit. It could also mean paying higher interest rates on new credit cards and loans. This number can help you decide what car you can afford.
What kind of loan?
Secured loans typically provide lower interest rates because you are offering up the car as collateral. Unsecured loans, which are generally offered in the form of a personal loan, may have higher interest rates. It can also be worth shopping around to find out whether you might be able to get a secured personal loan with a lower interest rate than that quoted by your prospective secured car loan.
Negotiate on the price of the car, not your payments
Many people learn this lesson the hard way, when they tell the car dealer the monthly payment they can afford and – almost magically – the car they want ends up costing them exactly that much. First negotiate on the price of the car to get the best deal you can. Then negotiate on the interest rate for the loan. If you don’t like the interest rate or terms the car dealer offers, shop around and ask your own bank, as well as other banks and credit unions.
Make up the difference with a deposit
“No money down” deals sound great – until you realize how much more you are likely to pay in interest over the life of the loan. If you are without a car payment now, set aside what you would pay for a car loan for a few months and use the savings as a deposit. Not only will you get a better idea of what your budget can afford, you’ll cut a nice chunk of principle – and the resulting interest – out of a loan.
Lease or Loan?
A car loan is not always the best choice. If you fit the following criteria, a car lease may be the wiser decision. You might be a good candidate for a lease if you:
- Drive a limited number of miles per year.
- Plan to get a new car every two to five years.
- Have excellent credit.
- Treat your car well and keep it clean and well-maintained.
- Can’t afford the monthly loan payment to get the car you want.
Shop around for the deal that suits your needs best!
This article contains general advice about car insurance. The author has not taken into account your financial situation or needs and you should consider whether the advice provided is appropriate for your own circumstances before relying on it.
Filed Under: Insurance Tips
