Auto Financing Essentials

The first step to successful automotive finance services is understanding the basics of car loans. We’ve broken this complex topic into its bare essentials to tell you what you need to know to find the best deal. You do not want to fall victim to one of the missteps of automotive services. The more informed you are, the better your decision will be.

Auto Loans: The Four Basic Components

To separate the good car loans from the bad, you need to compare them on the basis of four criteria: down payments, monthly payments, terms, and interest rates. Each of these components is explained below.

1. Down payment. Though consumers are increasingly straying away from sizeable down payments on car loans, the down payment is very important. A down payment is almost a guarantee that you will not end up upside-down in the loan, meaning you owe more on the car than it is worth. This is not a good situation to be in because it means you have negative equity in your car. To avoid this, experts recommend making a down payment of around 20%. Remember to include the value of your trade-in in this number. Making a 20% down payment essentially means that you have paid up front for the depreciation your car will incur in the first year. In other words, you will begin building equity in the car by the second year, opening up more options if you wish to sell or trade in for a new vehicle.
2. Monthly payment. Most buyers regard this as the most important part of automotive finance services, but try not to fixate on this number. It is only one small part of the entire loan package. Dealers will try to cajole you into loans by quoting you monthly payment numbers, which are easy to get caught up in. To prevent this, it is best to apply for your car loan after having set a budget for your monthly payment. Know what you can afford and what you’re willing to pay.
3. Interest rates. Interest rates are also referred to as APR’s, or annual percentage rates. In your car loan, you want the lowest APR possible. The APR is a good basis of comparison when you are trying to decide among several loans. Of course, this rate can vary tremendously according to your lender and your creditworthiness. Also, keep in mind that used cars can cost less and incur less depreciation than new cars, but the interest rates on used car loans will not be as competitive as those of new car loans.
4. Loan terms. Loan terms usually extend anywhere from 24-60 months, but experts advise consumers not to go over 48 months. Even though extending the term of the loan may enable you to buy more car for the same monthly payment, you will end up paying more interest over time, so the car still costs you more. There is also the risk that if your car is in a collision or stolen that your insurance company will not reimburse you as much for the car as you owe. Thus, you would end up losing a considerable amount of money.