When I was 17, my family got me my first car. I affectionately named her Betty and she was a fantastic, reliable little thing. I drove Betty – or rather, she drove me – through college and into my early-20s. Then, one day, Betty died in a fiery crash caused by another driver, who happened to be recklessly WRITING A CHECK while driving. Not only was I devastated over the loss of my sweet ride, but I was totally unprepared to purchase another vehicle.
Feeling the pressure of not having a car, I had to secure a new vehicle fast. After a couple frantic hours test driving half a dozen cars, I ended up purchasing another vehicle without doing any research on the car or the loan. Luckily, everything turned out just fine, but since that time I’ve learned a lot more about auto loans and buying cars.
Hopefully, the following five tips will help you avoid a situation much like the one I ended up in after the death of my first car. Knowledge is power, especially when working with lenders. Trust me on this one.
Know Your Budget
Before deciding on a car, you will want to examine your budget. Just because you qualify for a $20,000 loan, doesn’t mean you can afford it. My recommendation would be to take a look at your expenses and determine what you can comfortably pay per month.
Too many people fall in love with a car they can’t afford and end up over their head. Also, keep in mind that the more you have to put down as a down-payment, the lower your monthly payment will be.
Lenders are not all created equal. In actuality, you may find a significant difference in interest rates and terms between various lenders. Before stepping foot on a car lot, therefore, you will want to research the different options available to you.
I recommend looking into local banks, credit unions, and online financial institutions like Capital One for your auto financing needs. While a dealer may be able to beat your best rate, it is important that you know that info beforehand. Consider it one of your bargaining chips you can whip out during negotiations.
Believe it or not, having just an OK credit score versus a good one can cost you thousands over the course of a loan. Lenders give the best interest rates to those with the best credit. This is just more motivation for you to get your credit in tip-top shape, before you actually need it.
Another point to consider is that when you get an official auto loan quote, the lender does a “hard pull” inquiry on your credit. This will actually shave 2-8 points off your score. For those who have excellent scores, that’s not a big deal. But if your score isn’t perfect, this could be detrimental.
To get around “hard pulls,” consider peer-to-peer lending like Prosper or Lending Club. Do keep in mind, though, that they often have origination fees. Alternatively, pay to have your own credit report and score run by Equifax, Transunion, or Experian. Then, print out the full report and bring it to the lender. They should be able to give you a quote based on that information. Lastly, Capital One Auto Navigator offers pre-qualification with no risk to your credit.
Interest rate is not the only consideration when choosing a lender. You will also want to take into account if they have origination fees or if they charge a penalty for early pay-offs or extra payments. Some banks *really* want you to pay the full amount of interest on the loan, so they lose out if you pay it off early. Avoid them, if at all possible.
Before shopping for your car, check with your insurance company to see how much your monthly bill will go up with the purchase of a new vehicle. Lenders require you to have full-coverage on your car, which can cost significantly more than liability-only. Don’t be surprised if the insurance for your car costs $100-200 per month. That’s why you absolutely need to consider that extra expense when figuring out your budget.
In addition, I highly recommend paying a bit extra for gap coverage. In a nutshell, gap coverage pays the difference between what you owe on a vehicle and what your insurance company pays if the car is considered a covered total loss. Nothing is worse than being “underwater” on a loan. Having to pay the loan company if your car gets totaled sucks.
If you’re still feeling a bit overwhelmed, consider just popping over to Capital One Auto Navigator. As mentioned above, getting a quote from them doesn’t affect your credit. Plus they offer some neat options like the ability to explore different cars and loan terms. Easy-peasy, lemon squeezey.
Disclosure: This post was sponsored by Capital One, a bank I personally use and recommend, but of course, all opinions, information and advice is entirely my own.