Things you need to know before you finance your next vehicle
New vehicle prices keep rising year after year, with Kelly Blue Book indicating that prices rise nearly 3% annually, and the average price of a new car was more than $37,700 in approximately mid-2020. That is nearly $1,000 more than the same period, prior year. That’s just for a light car, so if you find yourself in the position to be considering a new SUV, truck, or even midsize sedan, you can expect to pay substantially more money for your vehicle.
Since most people don’t have the approximately $40,000 they’d need for a new car simply lying around, they frequently look to finance the cost of the vehicle with a loan. There can be a lot to consider before taking that leap and signing on the dotted line, just so that you can drive away in a brand new car. Make sure you are factoring in all the variables and covering your bases before starting to browse for those new wheels and make sure you’re ready for all that entails.
The ultimate decision of whether to finance or not to finance will be a highly personal one that only you can answer. Financing can be incredibly appealing to those who may be eyeing a new car, but absolutely don’t have an extra $30,000 to $80,000 liquid to just throw at a car. Even people that do have that ability tend to finance rather than buying outright since there are other benefits to financing, like a lower price, improved credit report reflection, and more.
In the majority of cases, however, there are going to be some initial questions that need to be answered. These considerations will generally be the same for most people who may be considering getting a new car. If you are in this situation, ask yourself the following:
- Do you need, really need, the vehicle badly enough that you are willing to lock into a monthly payment for the next several years?
- Does the deal, meaning all of the components like price, lending rate, payment, term, and so on, sound appropriate for your situation?
- Ultimately, is the payment something that will work for your existing budget?
Being able to “afford” something is a rather vague qualification, and many people feel they can afford things that are wildly outside of their range of affordability. Before you jump in too deep, make sure that you have these three pieces of information from any dealership you’re considering doing business with.
This is one of the biggest factors that influence how affordable one car loan is, relative to another. The total purchase price should be clearly indicated and will include not only the base price of the vehicle but also any add-ons, packages, treatments, and so on that you may be financing. This will also include the taxes and many of the fees associated with a vehicle purchase. In many cases, this will end up being the total amount financed, or the total amount of the loan.
The interest rate or annual percentage rate (APR) is the percentage of the loan amount that you will pay in interest. While differences between lower rates will often look inconsequential, the difference between a low rate and one a few points higher can be significant. For example, if you finance the full cost of a $50,000 truck at 4%APR for 5 years, you will pay a little over $55,000. On the other hand, that same loan with a 7%APR leaves you paying just shy of $60,000.
This is the length of the loan. While a longer term means you will have lower monthly payments, it also means you will be paying more over the life of the loan. The faster you pay off the loan, the less you will need to pay in interest. In most cases, you will find loan options with terms of between 36 and 72 months. While it is possible to get financed for terms of 7 years or longer, you should consider the practical lifetime of your vehicle. If you finance a new car for 8 years, how much will you be paying in maintenance and repairs during the last few years of that loan?
If you have bad credit or limited credit history, you may have a more challenging time finding auto loans, but that doesn’t mean financing a car is a pipe dream.
Many locations that cater to blemished or limited credit will be able to finance you in-house. You have probably seen them advertised as “buy here pay here”, and while you will generally have a little bit different loan term, they are certainly an option for some.
Bear in mind that in most cases and locations, car dealers that finance in-house do so with loans that are often considered predatory. Other predatory loans are payday loans, so that tells you what kind of interest and fees you should be expecting from dealers like these.
If your credit is relatively healthy and you work with your own bank, you may have the option of taking out an auto loan or a personal loan. This can open up more options for vehicles, including vintage or restoration projects, as well as older vehicles. Many banks will not underwrite an auto loan for vehicles that don’t run or are older than a specified number of years.
This is something to think about before you finish up and get the paperwork done. If you are trading in a vehicle or two towards your new car, you will need to make sure that you are getting a fair trade-in value for it.
This amount will help negate some of the total cost, lowering the overall amount you need to be financed. This will be something to verify before you “decide” on a vehicle, so that you can get a trade-in value that is unaffected by the value of the car you’re buying or the down payment you’re making.
Many people find that the best value is found by avoiding trade-in programs entirely, and selling the older vehicle on their own, privately. This usually leads to getting a far better price for it. This money can then be used to augment the down payment or to help pay off the loan faster.