Okay, so you are already picturing to yourself how great it will feel to sit in that car you just found at a fair price and drive it home. Now comes your next big decision, how will you pay for the car? Some experts say that paying cash is the only way to go, but the truth is most buyers choose to get a car loan even if they can afford to pay cash upfront.
Why? Here are some reasons buyers choose to finance their auto purchase:
1) They don’t want to deplete their savings in a one-time transaction.
2) They have spent the last few months nursing their car along and even with a manageable car payment, they were spending a few hundred dollars extra a month for repairs.
3) They do not have enough cash on hand to buy the car they want or need.
The reality is an auto loan is the best choice for most buyers.
Once you’ve made the decision to apply for a car loan, these are a few questions you need to ask yourself first before applying.
What is my credit score? What interest rate can I qualify for?
MyFico.com and Bankrate.com are great places to do this research. Auto loan interest rates can vary greatly depending on your credit score. If you know your score beforehand, you will have a better idea of what your rate will be when you apply for the loan. Also, keep in mind that if for some reason you do not get the loan from the first lender there are plenty more out there. So keep trying and as long as you are employed you should be able to find an auto loan that fits your situation.
How much cash do you want or need to pay upfront?
Consider how much you are required to pay as a down payment based on the loan amount you qualify for and the total cost of the vehicle. Then, decide how much cash you feel comfortable paying in light of your savings and monthly disposable income. Your disposable income is your “leftover” income after you pay your bills each month.
Do you want a lower monthly payment or a lower interest rate?
If you do a shorter-term loan, you will get a lower interest rate, but you will pay a larger monthly payment. If you takeout a longer-term loan, you will have a lower monthly payment, but a little bit higher interest rate. According to Experian’s 2012 report, 58 percent of new car buyers are choosing to extend the terms of their loans to 5 or more years. This is the current trend, but you need to think through what makes the most sense for you.
After you work through these three questions, you can apply for the car loan you need with confidence and you will be driving your new car home with a big grin on your face.