While there are many personal investments that you can make in life, few compare to the feeling that is synonymous with buying a car. It would be awesome to buy your dream car out of pocket; however, most people aren’t that fortunate.
The chances are that an auto loan is needed for you to complete that purchase. Should you decide to get one, that shiny new car can be yours, but this is not a decision to make without careful consideration. If you are deliberating it, you could use some sound information to inform your decision. So here are some things that you need to bear in mind as you decide.
How Strong Is the Need?
A car is not a need in most cases. What’s the worst that can happen if you choose not to get the car? Are the mass transit options available to you that inconvenient? While you may not want to admit it, a car is a luxury item. What you really purchase is the power of convenience in travel. While this can be very advantageous, it’s not always worth taking out a loan.
Of course, auto loans aren’t always used to acquire vehicles for personal use. It is possible that you want the car to help you with your new business venture. Whatever the case may be, it’s a good idea to pencil out the pros and cons of having a vehicle versus not having one.
Depreciation
While a car can be an asset, it is a depreciating one. The moment you turn those keys or push that button, the value of the car begins to plummet. If you’re not using the car for hire, it could even feel like a liability. Is something that continuously loses value worth paying for over an extended period?
A good idea is to create a plan of action that revolves around how long you plan on keeping the vehicle. You could consider selling it after a couple of years to wrap up your loan.
What Fees Are Required?
Loans are usually not free to obtain. An auto loan reinforces this point even more because you almost never get 100% financing for a vehicle. This means that you need to come up with a portion of the total cost.
What’s more, the down payment is typically calculated based on the value of the car. If the value of a car is high enough, even a 10% upfront payment can feel like a nightmare. Bear in mind that this is just one financial prerequisite that is required for the loan.
There is also a processing fee that the bank charges for handling the loan request. This fee covers the bank’s time and monetary costs associated with reviewing your application. One such process is the completion of a credit check, which has a big part to play in acquiring the loan.
Your Credit Score
As the previous point indicates, the lending association usually performs a credit check. You want to ensure that your credit score is as good as possible prior to your application. Not only does this score indicate your ability to repay, but it can also be the key to getting favorable repayment terms.
Continuous Affordability
If you think the cost of a car is equivalent to its price tag or the cost of an auto loan, you’re mistaken. A car is a man-made machine that is comprised of more parts than you can imagine. Most of these parts need changing and servicing at intervals. There are also various fluids that run through a car, which must be monitored and changed when necessary.
As you also know, unless your car is fully electric, it runs on fuel, which is something you must buy consistently. The costs associated with fuel and maintenance must be factored into the disposable income that you have available monthly.
It’s easy to fall in love with the idea of owning a car because of its convenience. However, you must continuously address overhead costs while making timely loan payments. No one needs to remind you that an auto loan is an expensive form of debt.
One of the worst things is getting into a cycle that causes you to routinely pull on your savings just to address your debt. As you can imagine, that cycle can only go on for as long as you have savings to use. Even if you do have vast savings, try to avoid putting yourself into this position, as you deprive yourself of the chance to use your money for more desirable reasons.
Car Type
There are so many factors that vary depending on the type of car you choose to buy. It’s nice to follow your dreams, but it’s also a good idea to choose your vehicle wisely based on your intentions and your financial situation.
Some vehicles lose their value very slowly. In contrast, the value of some vehicles moves with all the quickness of a landslide. This is a very important consideration if you decide to sell the car in the future. Even after you’ve used the vehicle for years, the price tag should still make sense.
The year of the vehicle is also important. Many lending institutions use this as a measuring stick for the financing that they provide to you. Newer vehicles have an advantage here, as you’re more likely to get something like 90% or even 100% financing. The more that the bank covers, the less you need to pay upfront. Additionally, vehicle vendors are more willing and able to support their newer models than they are older ones.
You should also try to find out what maintenance is like for any vehicle that you consider. Are the parts easy to obtain? Are they costly? How many places are qualified and willing to work on such a vehicle? Answering these questions at such an early stage can save you from a huge headache later.
Is the Deal That You’re Considering the Best One?
Every lending institution does its best to encourage you that the deal it offers is some kind of golden opportunity that you can’t get anywhere else in the world. While they could be right about this, they could also be doing nothing more than using a sales tactic.
Don’t commit to anything until you’ve explored all available avenues. You may be able to negotiate a better price with a dealer if you try to. Though dealer offerings can appear attractive, lending institutions are sometimes affiliated with the dealers. This means that the price you get could be horrendous.
You should collect the information you need from the dealer, then compare it to what other loan alternatives are. Ensure that you familiarize yourself with all the conditions that come with each loan.
Interest Rate
This heavily determines how much the loan costs. Once you take an auto loan, the total you repay is always more than the initial loan. That’s obviously how loans work. However, you don’t want to end up paying 150% of the original amount that you borrowed.
It is very important that you ascertain the interest rate for a loan and how it affects the loan balance every time it’s applied. Loan agents are always willing to answer all your questions, since they want to convince you to take a loan. Find out how the principal changes annually so you can decide if getting the loan is worth it.
Pre-Closure Conditions
Even if you take out a loan that’s repayable over six years, the chances are that you don’t want to be paying for a vehicle that long. Most people have a similar mindset, which is why they aim to pay off their loan balances as quickly as possible.
In some cases, this doesn’t affect your balance because the interest is pre-calculated in the monthly payment. In other cases, an early payment could reduce the amount of interest that is applied to the loan. There are also cases where you’re charged a fee if you close out the loan earlier than you agreed to in the contract.
Being done with the bank is a great feeling, but in all of this, you still need to consider what is best for you.
Late Fees
Unfortunately, many loan agents don’t bother to cover this condition, and so many people have been unpleasantly surprised by this. There is usually a monthly payment deadline stipulated in your loan agreements.
If you happen to miss this deadline and make a late payment, you could see an unfamiliar charge pop up. Of course, this is quite an inconvenience when you’re working to lower the loan balance.
Just remember to read through the conditions thoroughly. If you don’t see anything that covers a relevant scenario, don’t be afraid to ask the necessary questions.
Use Pre-Approval to Your Advantage
Being pre-approved for a loan is not a guarantee. However, if you can, try to get pre-approved once you find terms that are acceptable. This is not a confirmation for the loan, which means that you haven’t committed to anything.
The best thing about this is that you are usually given a quote. This quote establishes the loan amount, and you even get a letter to use in your car shopping. This letter could be the thing that helps you get the most favorable rate possible.
When you are considering the purchase, the dealer may seize the opportunity to tell you about a great financing package. Assuming the loan you’re pre-approved for is a better deal, you could use the letter as a bargaining chip.
Life Is Unpredictable
This is something that you need to keep in mind when you make any decision. Are you in a good job now? You could lose it way before your loan payment term comes to an end. It’s also possible that unexpected expenses can pop up and mess with your ability to pay the loan.
What you need to do is consider your situation and determine if you have an alternative method of meeting your loan commitment. Whether you have an alternative source of income or a wealth of savings, you need to be sure that you can take care of your payments if things go downhill.
