The average vehicle today costs about $30,000 new and $17,000 used, which means that most people won’t have enough cash to pay for the entire cost and will need financing to purchase that vehicle. It’s important to understand the basics of an auto loan before you head out to do some car shopping so you can get the best deal on the car, and on the financing terms.
Options for Auto Financing
There are two basic options to finance a vehicle: you can either go through the dealership or you can get a loan from a bank, credit union, or other auto lender (direct financing). In both cases you agree to pay the full amount of the vehicle, plus a specified interest rate, over the life of the loan. The benefit of getting an auto loan from a bank or credit union versus the dealer is that you have the ability to shop around and compare rates so you can get the best terms, which will save you money over the course of the loan. If you decide to get direct financing you will be able to find out your rate and the amount you can get approved to borrow in advance, which can help while shopping.
Determine Your Loan Amount
Before you start shopping for a vehicle it’s good to have an idea of how much you want to spend on your monthly car payments. You can use online calculators to figure out the total price you can pay for a vehicle based on your interest rate and financing options; this will help you narrow your search to the vehicle that fit in your budget so you don’t waste time and effort with a car you can’t afford. You should also investigate the long-term costs of owning the vehicle to make sure it’s something you can afford. That might include paying for annual registration, oil changes, new tires, and more.
Understand Loan Terms and Variables
Traditional car loans are about five years, but not all loans today fall into that time frame. Some lenders may be willing to extend the term of the loan to help make your monthly payments lower. The basic variables that determine your payment are:
- Total price you negotiate for the vehicle
- Taxes, fees, and other charges from the dealership or seller
- Annual Percentage Rate (APR) of loan, generally determined by your credit score
- Length of the loan contract
- Any cash you put down when you purchase (down payment)
- Equity or negative equity on a trade-in; if you owe less than the seller is willing to give you for your existing vehicle that will be positive equity you can put toward the new car cost, if you owe more than you can trade it in for that is negative equity that will usually be added to your loan payment
If you are in the market for a new vehicle, start today by talking to Wasatch Peaks to see what kind of financing you could get to make that dream car a reality.