Before You Set Your Sights on That New Car, Think about Financing Options
Shopping for a new car can be exciting, but it requires some work on the part of the consumer. Once you've figured out the make and model of your dream car, the color, the options and the price, you may think you're done. But the most important decision is yet to come -- how will you finance your car?
Your decision on financing affects much more than simply whom you write a check to every month. It also affects how much you end up paying for your car in the form of interest. You'll find that while there are plenty of financing options, not all are created equal. Here are some factors to consider when making your decision.
Car financing is available from various sources. Make sure you choose the one that best suits your needs:
- Many car buyers opt to obtain a loan from the dealer. This is certainly a convenient option, but it may not get you the best rate. Although dealers often advertise extremely low interest rates, those rates are reserved for people with spotless credit histories.
Keep in mind that dealers obtain loans through local banks and finance companies, as well as through the automakers. Dealers usually add a bit to the interest rate over what they pay for the loan, keeping the difference as profit. Persuasive dealers working with uninformed buyers can make as much off financing a new car as they can on the car sale itself.
- You can also borrow from a bank, credit union or finance company. These lending institutions offer set loan rates, eliminating the need to haggle. Credit unions typically offer the lowest interest rates, and finance companies are usually the most expensive.
- If you have a home equity loan, you can borrow against that for your car payments. The advantage of this option is that interest on home equity loans is tax deductible. The danger here is that your house, not just your car, is at risk if you can't make the payments.
Before you apply for a car loan, it's a good idea to review your credit report to make sure all the information is accurate and current. By checking your credit report regularly, and especially before you plan a big purchase, you can catch possible inaccuracies and dispute them. For many people, it makes sense to subscribe to a credit monitoring service, such as the one offered by ConsumerInfo.com, which allows you to check your report as often as your like. There are three separate consumer credit agencies that report your information to potential lenders. Services such as CreditMatters.com offer comprehensive, detailed, easy-to-read three-bureau reports that let you know where you stand with all of three consumer credit agencies.
All types of lenders will look at your credit report to assess your credit risk and worthiness. Information in your credit report may be used to calculate a credit score, which can range from 375 to 900 points. Generally, people with scores of 650 or above are considered to have a very good credit history. Your credit score is the most important factor in determining if you'll get approved for a car loan, and what your interest rate will be. If your score is low, you'll pay high interest rates.
Just because a lender says you can afford to pay a certain amount each month doesn't mean you should. Another important figure to consider before a large purchase is your debt-to-income ratio. Divide your total monthly minimum debt payments (not including mortgage or rent payments) by your monthly gross income to get a percentage of debt to assets. Your monthly payments include car payment, installment loans on furniture or appliances, bank or student loans, minimum credit card payments and medical care payments. Your income includes your paycheck, any alimony or child support payments, bonuses, commissions and tips. In general, 35 percent or less is considered an average debt load.
You know the details of your expenses and budget better than anyone else. Don't accept a higher limit if you are uncomfortable. Doing your homework before you shop will enable you to walk away with both a payment you can live with, and a car you love.
For a free credit report, visit www.consumerinfo.com.
Courtesy of ARA Content