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Choosing a Car Loan: Tips and Traps
December 21, 2020● 4 minute read●
Getting a new ride takes a significant amount of money, not just for purchase but also to run the car. Most buyers can’t finance this cost on their own and therefore seek loans to help them out. This is not wrong at all and might even save you money on taxes, depending on the type of loan you get. However, this is not a decision to rush as they’re a lot of deals out there that can totally drown you if you’re not careful.
You need to do proper market research and be sure you’re getting the best deal possible on all sides. Put in the same amount of effort you put into car hunting to loan research or even more. This article will be providing some tips to follow and traps to avoid while taking a car loan.
Tips to follow when taking a car loan
Check the interest rates
The interest rates on a loan will determine your monthly loan repayments. It goes without saying that this shouldn’t be overlooked. The first step to make before filing loan applications is to compare rates of different banks and financial companies. This will help you know what standard rates are before you start negotiating. Interest rates vary from bank to lender, and a small point difference in rate can affect how much you pay significantly. Make sure you negotiate the best rates with your lender, especially if you have the advantage of a good credit score and high income.
It’s much smarter to get quotations from different lenders to allow for proper evaluation. Same way, you go round searching for the best deal with free coupons and discounts while shopping online. Get quotations for not just rates but also fees and extra charges involved in getting a loan.
Prepare your documents
Your lender will request some documents to evaluate you on. Such include means of identification, bank statement, credit record, etc. Ensure that all these documents are cleared and ready before applying for a loan.
Check your credit score
You should go into loan negotiations with knowledge about your credit history. Having a good credit history might mean better rates for you and you should take advantage of this. Lenders will use your credit rating to gauge the risk of lending money to you. A low credit score might also put you at risk of being rejected, and it’s important to know that beforehand.
Get a car insurance policy
You are required to have compulsory third-party insurance to protect other people’s lives and properties when you buy a car. However, it’s also really wise to get comprehensive car insurance that can protect you from unforeseen debts. This is important, especially when opting for a secured car loan.
Consider after-factory tax
You might want some premium extra features on your car like custom wrapping, tinted windows etc. An alternative to buying a top expensive car with all these features will be to buy a simple car and add those extras as after factory modifications. This option is usually cheaper and will reduce the amount of money you’ll have to borrow. You’re after factory extras might be covered by your comprehensive insurance, depending on your insurance company. Make sure you check to confirm.
Get loan preapproved
A good negotiating power can give you better loan deals. Getting a loan preapproved means getting approval for funding before hunting for a car. This comes with a time limit and the money isn’t released till you’re ready to buy the car. However, this is important because it gives you an idea of how much you’re going to be borrowed before negotiating with your dealer. Some dealers tend to inflate the price of the car so as to offer what seems like a good finance deal. A loan preapproval can protect you from that.
Put up to 20% down
Some dealers will require you to pay a deposit while others won’t. Not paying an initial deposit might be really tempting, but it’s actually a bad idea. This is because the value of your car depreciates over time. Not paying enough for it now might lead you to make loan repayments far more than the car’s worth and value. Having up to 20% as your initial deposit also reduces your monthly loan repayments.
Traps to avoid when choosing a car loan
Some dealerships or lenders offer low and attractive interest rates, only to pad it up with fees and charges. This is why it is important to not focus on just your monthly repayments. You might be paying bogus irrelevant fees unknowingly. Some dealers might also ask you to pay sales tax. You have to have a pool to pick from after proper research. Ask for a breakdown of the fees you are expected to pay and question anyone that seems redundant. Find out about every fee you’re paying before agreeing to a deal.
Balloon payments actually end up blowing up on you like a balloon. This is usually the case when the borrower seeks for a low monthly loan cost. Balloon payments are arranged by reducing your car’s residual value so you can have low monthly repayments. This comes to bite you at the end of the loan term when you have a huge amount to pay before the car can be fully yours. Make sure that any balloon payment will be one that is affordable and reasonable in relation to the value of the car.
Long loan terms
Car loans average three to seven years but it’s advisable to not go longer than four years because of the depreciating nature of cars. A long loan term will mean more months to divide your loan cost by, leading to lower monthly repayments. However, interest is paid every month as profit to the lender, and the more months you have to pay, the more interest you pay.
Written by Jacaranda Team