(This is a guest article by Karen Schweitzer*)
Car dealers are working very hard to make sure that auto sales rebound over the winter season. And while it may seem like the ideal time to buy a new car, there are a few things you should know before you get an auto loan:
- You Will be Subjected to a Credit Check
- You May Need a Co-Signer
- Loan Rates Will Vary
- Loan Terms Affect Monthly Payments and Overall Costs
- Zero-Percent Financing Isn't Always Available
- Gap Insurance May Be Necessary
- Extended Warranties Can Be Financed
- Some Lenders Charge Prepayment Penalties
- An Auto Loan Can Improve or Demolish Your Credit
- You Can Refinance Later On
Although there are some car dealers who are willing to finance buyers without a credit check, most will not. If you get a loan through the dealer or through a bank, you will be subjected to a credit check. Lenders will evaluate your debt-to-income ratio as well as your credit score before deciding whether or not to give you a loan.
If you have bad credit or worse (at least in a lender's eyes) no credit, you may need someone to co-sign for your loan. Your co-signer doesn't have to be married to you or related to you, but the chosen individual will need decent credit. If you do decide to go this route choose carefully. The co-signer's credit score will impact the interest rate on the loan. The co-signer will also be responsible for the loan, late charges, penalties, and late fees if you default on the loan.
Like other loan rates, auto loan rates will vary from lender to lender. If one lender quotes you an interest rate of 5.25%, it may not be the lowest rate you are eligible for. Be sure to check with at least three different lenders before signing on the dotted line.
The average auto loan term ranges somewhere between 36 and 72 months. The longer the term is, the lower your monthly payments will be. A longer term may seem attractive initially, but it is important to remember that if you go this route you are likely to pay more in interest than you would with a shorter term. In other words, the longer your loan term is, the more the loan will cost you in the long run.
A lot of auto dealers and manufacturers advertise zero-percent financing on new cars and trucks. They do this to get buyers in the door. It isn't necessarily a gimmick, because some people do qualify for this sort of financing. However, most people will not. Buyers need exceptionally good credit--a score of 700 or more--to be eligible for incentives like this.
The average car is a depreciating asset. This means that the car will decrease in value as soon as you buy it and will continue to do so as long as you own it. If you pay too much for the car, don't make a down payment, or get saddled with a bad interest rate, you could end up owing more on the car than it is worth. This could leave you in serious trouble if you wreck the vehicle or need to sell it quickly. If you are worried about this happening, you can purchase gap insurance, which covers the difference between what you owe on the car and what it is worth.
Nearly every auto dealer will try to sell you an extended warranty when you buy a new vehicle. The decision to purchase a warranty is a personal one and should be considered carefully. Before you make a choice, you should know that extended warranties can be financed. You should also know that financing an extended warranty will up your monthly payments as well as the total amount you pay over the life of the loan.
A lot of people like to apply extra money to their auto loan each month to reduce the interest paid throughout the term of the loan. If you are one of those people, you will want to make sure you're lender does not charge any sort of prepayment penalty.
An auto loan can be very beneficial for people who have bad credit or a limited credit history--if payments are made on time. Late payments or defaults will have the opposite effect and can leave your credit score in ruins.
If you do end up with a higher interest rate than you'd like or loan terms that are not favorable, you can always refinance your loan later on. You may have to pay an application fee or another small lender fee, but the cost of refinancing will be minimal.
*About the author: This is a guest post from education writer Karen Schweitzer. Karen is the About.com Guide to Business School. She also writes about online degree programs for OnlineDegreePrograms.org
*Image Credit: Photograph by rev [via Flickr Creative Commons]