Before car shopping, determine what you can afford. Experts suggest all of your monthly payments should be less than 40% of your gross or pre-tax income. Next, determine how you will pay for the car. A traditional car loan isn't the only alternative. If you own a home, borrowing against your equity to pay for a new vehicle may be more appealing to you. The reason: interest payments on a home equity loan may be tax deductible. Consult your tax adviser to see if you're eligible.
Do Your Homework
Once you know what you can afford, look for models that match your needs. Factors to consider include reliability, safety and fuel efficiency. Check a car model’s reliability on a site such as Consumer ReportsOpens in New Window or Edmunds.comOpens in New Window. To check a car’s safety rating, visit the Insurance Institute for Highway Safety’s web siteOpens in New Window. Compare the fuel efficiency of models that interest you at the U.S. Department of Energy’s web siteOpens in New Window.
When buying from a private party or a used car lot, be sure to get a clear title history and insist on a mechanic inspection. Get a CARFAX report at carfax.comOpens in New Window.
When Zero Percent Sounds Too Good to Be True
You’ve seen the ads, zero percent financing. The automobile manufacturer's rate seems great. What could go wrong? Plenty, if you take a look at the fine print.
- These low rates are often available only to those with the best credit records and on brand new vehicles only. One small credit blemish and the rate goes up. SVFCU finances late model used vehicles at the same interest rate as new.
- Many of the companies are offering these low rates for loans with shorter terms (36 months or less). That increases the amount of your monthly car payments.
- The rates are sometimes offered only on selected models, which are usually not the most popular models.
- Consider the total cost of the loan, too. Will you be charged an application fee? Is there a prepayment penalty? Would you be required to pay front-loaded interest, that is, pay more of the interest earlier in the loan? You may carry a larger principal balance longer, meaning at some point the value of the car could be less than the balance of the loan.
How to Find the Best Deal
Your best deal could come from skipping the low dealer rate, taking the rebate the dealer is offering, and financing your vehicle through your credit union. Why?
- You start off with a lower loan amount if you take the rebate, saving you money in finance costs.
- You could get lower monthly payments with your credit union, because low auto loan rates are available for loans with longer terms as well as short ones, on both new and used vehicles.
- You may save money on the total cost of the loan as well, because SVFCU doesn't charge an application fee or prepayment penalties. Finance charges at your credit union are in the form of 'simple interest', resulting in the principal balance being paid down more quickly.
GAP Insurance protects you against losses if your car is stolen or totaled and your insurance company does not pay enough to cover your loan balance. Ask about it when you apply for your vehicle loan.