Most people have no idea how many intricacies a modern car loan can have; they are just interested in a monthly payment that they can afford. But, the more a consumer knows about car loans, which questions to ask and which things to insist on the better the chances are that they will drive away from the car lot happier, and in a new car.
There are two things you should do before shopping for a car; the car lots will try to turn this into an impulse buy, which is why they love it when an unprepared person comes into the dealership. It makes their job much easier and makes them more money.
So, before you even step foot onto a lot, get your actual credit score – not your credit report, but the real number. You will more than likely have to pay for this, but it is provided for free by some credit monitoring companies. Knowing your FICO score is important, as it will affect the length of the loan, the down payment needed and the interest rate. The FICO score is what the US creditors use as a standard measure; different countries will have different frameworks.
The other thing you should try to do is secure pre-approved financing from your bank or some other local bank. If you belong to a credit union, they often have great car financing options. This will give you the confidence, and allow you to base your negotiations on the actual sticker price; everything including the down payment is already set and negotiated, and you can pick any car within a set range.
Three main things go into understanding any car loan; the fourth is familiarizing yourself with the exact rules of payment and any penalties that may incur if you are late.
These three areas are the best way for a person who is not used to calculating compound interest to really understand their car loan completely. They are:
Term of Loan
Amount of Monthly Payment, Down Payment and Application Fees
The interest rate is the rate, compounded yearly, which you are paying to borrow money. This can range from dealer incentive 0% deals up into the 20% range. The interest rate you get is going to depend on your credit and employment history.
For most people to understand what the interest rate really means, look at you monthly payment, and multiply it by the term of the loan. This is usually figured in months and with new car loans is almost always set at 60 and 72 month periods.
Multiply this number with the monthly payment and that is the total you are paying for car. Subtract the sales price, and the balance is how much interest you are paying. It is extremely important that you understand the significance of these numbers as it will allow you to negotiate more effectively with the car company. They may be able to lessen your down payment or loan application fees.
This does not have to be frustrating, and preparation and knowledge is the key to a successful car loan!