It's easy to spend $25,000 or more on an automobile, making it the second largest purchase for many folks, second only to the house with the garage where you'll be parking the car. And while frugal personal finance gurus such as radio talk show star Dave Ramsey preach paying cash for cars, most people will finance the purchase of new wheels.
That makes shopping for the auto loan almost important as shopping for the auto.
Some things to keep in mind before you start kicking tires.
Know the score. It's critical to know your credit score before you start shopping for a car loan - or any loan, for that matter. The lower your score, the higher interest rate you'll pay. And that can make a big difference. The monthly payment on a $25,000, 48-month loan at 8 percent interest is $610. The payment on a loan with 4 percent interest is $565. Before shopping for a loan, get a free copy of your credit reportonline at annualcreditreport.com or by calling call 1-877-322-8228. Or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. This is the only legitimate place to get your free annual credit report.
Get the loan before you get the car. Shop for the best loan terms at banks and credit unions before you walk onto the dealership lot. Knowing what terms you can get from a bank or credit union puts you in a position to know if the dealer's offer is a good one.
Get it in writing. Many lenders, especially those from the car dealerships, promise customers a great interest rate, but the offer usually only applies to people with high credit scores. "Pre-approved" means there is still a chance you might not get the loan at the rate discussed. Before buying a car, make sure you have the auto loan approved and in writing, advises the New York Department of Consumer Affairs.
Avoid loan stacking. If you trade in your old car and it isn't paid off, a dealer may offer you a "stacking loan" that pays off your old loan and finances your new car. But be wary, says the New York Department of Consumer Affairs, because you're likely driving off with a car worth less than you owe on it.
Go short as possible. While it is tempting to go with lower monthly payments over the course of a longer loan, the cost can be substantial. A $20,000 loan at 8 percent stretched over 36 months has total finance charges of $ 2,562. That same loan over 60 months has total finance charges of $ 4,332.
Clint Williams is an Arizona-based freelancer for DImespring. He has written for the Arizona Republic and the Atlanta Journal-Constitution.