How to apply for a car loan online and get the best deal
Here's the biggest mistake car buyers make when getting an car loan
When most people apply for a car loan, they want to know if zero down payment loans are available and what will be the term period of repayment. Generally car loan companies are happy to extend loans without down payments and will send you a quote for the maximum repayment period possible. When the period of loan is as long as seven years, the monthly installment is much smaller. So it looks like it's easier to repay and most people opt for the longest period possible.
This is a big mistake and there are two reasons to avoid this:
1) The longer the period, the higher the APR (Annual Percentage Rate). The APR is the interest you pay on a loan. An APR of 9 % means you pay $900 as interest in a year on a $10,000 loan. An APR of 11 % means you pay $1100 as interest in a year.
2) The longer the period, the more the amount of interest you pay because you're delaying the repayment by that much time.
Let's say you're buying a car and need finance of $12,000. We'll assume you have average credit rating. Now the car loan company sends you a quote for
a 6 year period - Almost all companies will send you a quote for the maximum repayment period possible.
Now at 11.35% APR for a 72 months loan of $12,000 you'll pay $231 per month. Reduce the repayment term to 36 months and your APR drops to 9.89 % and your installment goes up to $387 per month.
If you opt for the 72 months period, you'll pay $16632 over the period of time. On the other hand, with the 36 month repayment period, you pay $13932 over the period of time. You're paying $2700 more in interest! That is a lot of money down the drain. You're paying back the loan at a higher interest for all 6 years just for wanting to delay repayment for 3 more years! This is ridiculous and seemingly unfair.
But I can't afford the installment!..you're probably saying. There're various ways you can fix this problem.
The reason you're probably thinking of opting for the longer repayment period is because you can't afford to pay the higher installment. For this, what you can do is to avoid getting 100 % finance for the car and finance part of it, about $3000 from your own funds. Reduce the loan amount. Sell some stocks or encash a bank deposit or get an advance from your employer or do something to rustle up about $3000. This will leave you with a loan requirement of $9000. Now, opt for a $7000 loan for a 36 month period. You'll get the lower APR of 9.89 %. At the APR of 9.89 % the monthly installment on a 36 month loan of $9000 will be $290.
You will pay $10440 towards the repayment of your $9000 loan. This way you've saved a lot of money in interest payments. See the savings below:
Interest that would have been paid on a $12,000 loan for a seven month period. ($16632-$12000) = $4332
Interest paid on a $9000 loan over a 36 month period = $1440
Savings in interest costs = $2892.
By just scrapping together $3000, you saved another $2892 in interest!
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Another way by which you can lower your installment each month is by improving your credit rating. Going from average to excellent credit rating can bring down the APR from 9.89 % to as low as 7.95 %, that's 196 basis points or almost 2 %. Improving your credit would need work and cannot be done within a week or two. You can keep that as a medium term goal and later opt for refinancing your car loan when you have excellent credit and are in a position to get an car loan on better terms.
You could also settle for a car which is less expensive that the one you're eyeing and reduce your monthly installments. Read car magazines and reviews online and settle on a car in the same bracket but less expensive by a couple of thousand dollars.
You could also consider cutting costs in some other areas where your expensives are higher and use the savings to pay the monthly installment towards your car.
At the end of the day, do remember that a car is a depreciating asset and every dollar you put into it is worth less and less as time goes by. Don't put too much into buying a car.
How much should you spend on the car?
It's a good idea to start the whole car buying process with introspecting about how much you should realistically spend on buying it. Buying a car is probably one of the largest purchases a person makes, after a house. It's possible to go overboard and spend too much money and many do just that. Keep your emotions in check and don't give in to peer pressure either. Easier said that done but it's the only way to avoid stress in the future. Calculate your own debt-income ratio. Add all your monthly installments you pay including car payments on cars you already possess, credit card payments leaving out regular living expenses like rent, mortgage, or utilities. Divide the total figure you arrive at by your monthly take-home pay, after any taxes and other withholdings have been deducted from this. What you get is your debt-to-income ratio. The Consumer Credit Counseling Service recommends that you keep your debt-income ratio below 15 %. You will get a loan even if your ratio is at 20 % but that would indicate that you have more debt than recommended.
Buying a used car versus a new car
You need to think about whether you're going to buy a used car or a new car. If you're buying a new car, there are many more options of getting finance. In most cases, the dealer you're buying from, will try to talk you into taking a loan through him. This is because he gets a commission from the company that makes the loan to you. If you're considering buying a used car, be aware that most companies will not finance cars which are more than 5-7 years old. For some companies the limit is five years while for some others it is seven years. Generally most car loan companies will not finance the purchase of cars which have more than 70,000 miles on them.
Trading in your old car
If you plan to trade in your old car, when you're buying another, check if the car loan company has a way by which they can help you sell your car.
Buying from a private party versus a dealer
Some companies let you buy from a private seller while others insist that you buy the car from a dealership. If you're planning to buy a 'sale by owner' car from your boss or brother, check if private party purchases are financed by the car finance company you're applying to. car loan companies require the seller to be the legal registered owner of the car.
Still others insist that you buy from a dealership registered with them. This may prove to be more expensive because it limits the possibilities of comparing rates. Even if you're getting your car a few hundred dollars cheaper elsewhere, you'r expected to buy from a dealer registered with the car loan company.
Certain types of automobiles are not financed
Some types of automobiles are not financed. Some car loan companies will not lend you money to buy a motorcycle. Most will not finance commercial vehicles. There are specialized companies which finance commercial vehicles. Other types of vehicles not finances by most car loan companies catering to consumers are recreational vehicles, conversion vans, boats, salvaged, conversion vans, repossessed or auctioned vehicles. You can usually get finance for a SUV (Sports utility vehicle)
Lease buyout finance
If your lease is ending soon, and you're considering buying out the lease on your car but do not have the money to be able to pay cash for your car, some companies offer finance for buying out leases. Not every lending company will.finance lease buyouts. The lender, in lease buyouts, will pay the entire sum due, to the original leasing company and then you'll have to pay a monthly installment for repaying this loan, to the lender. Buying out your lease can be a very smart decision sometimes. When you buy a used car, you don't know which parts are giving way or where it needs repairs. On the other hand, when you're buying out the lease on your own car, which you have owned for many years, it's a very safe decision as you're very familiar with the car and know what needs fixing. There are no unexpected expenses waiting to raise their head as soon as you become the legal owner of the car. We all know what used car salesman can be like! Lease buyouts can also help you save on penalties which you otherwise have to pay the leasing company, when you exceed a specific mileage threshold.
Title of the car
The title of the car needs to be in the name of the seller. Most companies will not approve of a transaction involving a power of attorney. You also may not buy from someone who stays at the same address as you do. car loan companies general do not finance the purchase of a vehicle from a spouse or domestic partner.
Income eligibility, residential proof and job stability.
Check for the income eligiblity when applying for a loan. Generally an income of $1600-$2000 per month is expected. You need to hold the same job for atleast a year. If you have a transferable job and have been moving as a result, that will be ignored and you will be considered as having the same residence, for this purpose.
Minimum and maximum amount of loan you can get
Car loan companies usually want to give a minimum loan of around $7000. If you're planning to buy a car which is cheaper than this, you should consider taping other sources. Maybe you can ask for an advance from your employer or borrow funds from family or friends. You could get loans against stocks or bonds or other assets which you own. Sometimes this can work out cheaper. The reason companies make getting a smaller loan a little difficult ironically is that for these companies, the cost of servicing a client is the same, more or less irrespective of the amount, which is why they set a minimum fee and it is more feasible for them to advance larger loans.
Most car loan companies will let you apply jointly with someone else. This can improve your repayment capability and make you eligible for a higher loan.
Refinancing your existing loan.
Many people consider refinancing their cars. Sometimes a person who buys a car may not have been cautious enough to question the dealer who was brokering the auto finance and gets stuck with a high-interest rate car loan. People also refinance their car loans when federal interest rates drop and they want to take advantage of the lower interest rates. Refinancing your car loan can save you hundreds to thousands of dollars, if you can get a lower interest rate. Just reducing the loan period can make you eligible for a lower APR. If your credit score has improved, it will further reduce your monthly installment and save you dollars.
The APR (Annual Percentage Rate) on your loan will go up or come down depending on various factors you'll be told. This includes your own credit rating, excellent, good, average or poor. APR also varies with how old the car is and how many miles it has on it.
Ask about all hidden charges up front. Ask for a schedule of costs. Visit the web sites of these car loan companies and they'll generally have costs mentioned. Be sure to read the APR declaration. By law, these car loan companies are expected to make it known explicitly the APR they're charging you.
Compare rates and negotiate
A car is a major purchase. Try not to get impatient and get rates from multiple car loan companies. Compare rates and opt for the lowest interest rate car loan on offer. You can negotiate almost everything in life.