Sarah T.
What is the car buying and loan pay-off process?
Some people might be able to go into a car dealership and put down $23k for a new car in cash. If you save for a long time, get a gift, or if you sell another asset you might be able to pay cash for your next car. But most people need to take out a loan. When you buy a car and take out a loan, that loan service provider will bill you each month. Just like any other bill, you pay it on time each month. Some of the payment will go towards paying off the interest of the loan, and some will go towards paying the principal amount you borrowed. If you pay every month, you’ll finish paying off the car within a couple of years, usually. Then, the car is yours.
How do you get a loan for your car?
Getting a loan is a process of knowing what to expect, being realistic, and surveying your options.
Your budget and your credit report
Think about how much you can realistically afford to spend each month on a car loan payment. Do you have $1000 that isn’t accounted for each month by housing costs, food costs, memberships, or other large loans? Maybe you only have $500 that’s available. Start there because you’ll want to find a loan that fits that budget. Nerdwallet suggests you budget for 10% of your monthly income after taxes to go towards a car payment. If you see $3,000 after taxes each month, your car payment should be about $300.
Next, check your credit report, because knowing your credit score will help you calculate what kinds of interest rates you’ll qualify for. If your credit score isn’t great, consider using a cosigner to help get you better interest rates.
Use a calculator like this one from Cars.com or our expense calculator to get an idea of how much you can afford. Don’t forget to factor in an extra thousand or two thousand dollars towards fees and extra, hidden costs. Also, if you don’t currently have car insurance, remember that car insurance can cost several hundred dollars per month.
Apply for a loan from multiple lenders
When you apply for multiple loans, you don’t have to take all of those loans. Applying for multiple means you’re shopping for a good rate. You might apply for loans from your regular bank. Look for credit unions that you can join, or online financial service providers. You might be able to get a loan right from the dealership, too.
There are a couple of things to look for:
A variable interest rate means your interest rate could change over the course of the loan. If you are able to pay the bulk of the loan back in a short amount of time, you might be able to access low introductory rates.
A fixed rate means your interest rate will stay the same over the life of the loan. Lower is better, of course.
Loan Terms tell you the amount of time you will have to pay off the loan. Usually, you’ll see terms for 36 months, 48, 60, or 72 months; RateWorks offers an additional term of 75 months. The longer it takes you to pay off the loan the more interest you will accrue and have to pay. A longer term, however, may reduce your car payments and fit your budget better.
Taxes and Fees can add thousands of dollars to the cost of your loan. You can’t get out of taxes, registration, or documentation fees, because those are processes that the state requires. Other fees, however, like destination fees, advertising fees, or paint protection could be negotiated as part of the sale. Make sure you understand exactly what fees will be added to the cost of your purchase before you make the purchase.
When you know what loan you can afford and qualify for, you will know what cars are in your price range. You can go to a dealer and tell them your budget and goals
Can you make your car loan cheaper or more effective?
Yes, you can often make your car loan cheaper through the following:
Refinancing and its impact on your loan
When you refinance your car loan, a company like RateWorks will pay off the entire total of the loan you have. Then, you’ll enter into a new loan with RateWorks. This means you can renegotiate the interest and loan terms. This can be really helpful if you got a bad interest rate when you made the initial purchase. People who are self-employed or retired can refinance, too, just by proving their financial stability. If you have a better credit score now, are looking to put a cosigner on or take one off the loan, or if you see opportunities to get a better interest rate because rates are improving, you can make your car loan cheaper with refinancing. RateWorks doesn’t charge any hidden fees either, so there won’t be any extra and unnecessary costs.
Pay off more of the loan sooner
The quicker you pay the loan, the less interest you’ll end up paying. Pay more every month than you have to so that you can see your principal balance fall quicker than expected.
Look for less expensive options
Used cars can be a great way to get a quality vehicle without the price tag. Or, you could consider going for an electric vehicle. Electric vehicles have cheaper fuel costs and often fewer maintenance costs each year, which can save you money in ways you may not have been expecting.
Why is paying off your car loan important?
Like any financial arrangement, there are serious consequences for you if you don’t pay the money you owe. If you don’t pay, your car might get repossessed. Your credit score will also be affected, making future purchases harder to qualify for.
When you do pay off your car loan, you end up with an asset that you own outright. Once you own it you can sell it for its full value, and use that chunk of change as a down payment on a new car. A 10k downpayment can make a nicer car suddenly much more affordable.
If you have an expensive car payment, talk with our team here at RateWorks to see what we can do to lower your monthly payment! Get a free auto refinance quote today!
