1) Your Monthly Payment Is All That Matters
This is a myth likely started by auto dealerships because it is them who mostly benefit from it. The first thing that most auto dealership salespeople will ask you, after you pick a vehicle, is what you want your payment to be. Seemingly this is all that matters in finding a vehicle that fits into your budget, but there is a problem. If you shop only on payment and do not look at the big picture, you could wind up in big trouble.
When a payment is all that you think about, you could end up taking a loan that is 6, 7 or even 8 years long. This dramatically increases the interest that you pay and ensures that you are behind on the loan for at least the first 3 to 4 years of the loan. What happens if your situation changes and you need a new vehicle in a few years? You could end up carrying thousands of dollars in negative equity on your next loan, which starts a vicious cycle of always being behind on your auto loan.
The truth is that while the payment should fit your budget, it is not the most important consideration to be made. Keep your loan length at or below five years and substantially reduce the interest that you pay. If the payment is too high on a 5 year loan, don’t stretch out the loan, pick a cheaper vehicle.
2) You Should Use The Dealer Finance Department
Many people assume that the job of the dealer finance department is to simply get you approved. They do not realize that the dealer might actually make more money from them in finance than they actually do on the sale of a vehicle. This is because dealers have a lot of tricks that they use to make money on the back end of the loan.
The biggest trick is bumping up the interest rate. For example, a dealer finance department might get you qualified for 5 percent interest, but write the loan for 7 percent. On a 30,000 dollar loan for a term of 5 years, that extra 2 percent adds up to well over 1500 dollars. That is money that goes directly into the dealers pocket.
The truth is that you need to have financing arranged before you head to the dealer, preferably from a local credit union. This will take the stress out of financing, because you will know and receive the rate that you actually deserve. You can still use the dealer finance department if you like, but now you have a number for them to beat.
3) You Can Spend As Much As Approved For
Your lender will do everything in their power to determine your maximum loan amount, but they are working with limited information. They know how much debt you have, but they do not know how much money you really spend in actual life. If you spend as much as you are approved for, you might wind up with an auto loan payment that is out of control.
The truth is that you should only spend what you can comfortably afford. Do not assume that the lender is right when they make an attempt to calculate a reasonable amount of debt for you. Take a look at your budget and determine how big of a payment that you can take on. Make sure that with the payment, you are still able to save at least 10 percent of your income. Once you have your payment in mind, plug it into a loan calculator and figure out how much you can spend.
4) You Save Money With A Zero Down Loan
Many finance companies will allow you to take out a loan with as little as 0 dollars down. This seems like a great idea, after all who wants to put money down on a loan if they do not have to. This comes with some problems though. The less you put down, the more you pay in interest. There will be more principal subject to interest and the rate will be higher because your loan is riskier to a lender.
The truth is that you should try to put down 20 percent on just about any loan. This does a few things. For starters, it make the loan less risky for a lender because you will almost immediately have some equity in the vehicle. If a loan is less risky, your interest rate will be lower.
In addition, putting more money down ensures that you do not get behind on a loan. Not having negative equity to deal with will allow you to escape a loan easier if your situation changes in the future.
5) You Are Stuck With Your Finance Deal
Despite everything, you could still visit the dealer without taking note of the myths above. Your dealership visit might be a last minute decision or perhaps you just didn’t feel like making the effort to do more research. In any case, dealer pressure being what it is, you could end up in a loan that is not very favorable and you might feel like you are stuck in a loan that is going to make you go broke. You are not.
The truth is that it costs nothing to refinance a loan. The majority of lenders do not charge any fees when refinancing a vehicle, which means that it is never too late.
If you feel like you made a bad deal, contact a local community credit union and ask about refinancing. You can refinance a vehicle without ever even making your first payment, so if you feel like you made a bad deal, take action right away.