You should never head to the auto dealership naïve. This will equate to a new or used car that you cannot afford, which will, in turn, equate to a credit score disaster. Auto loans are a fantastic way to build your credit positively, but only if you understand them and use them wisely. Getting upside-down in any loan is never beneficial, so take into account these five things before you head to the lot in search of your wheels.
1. Understand Financing
Your best bet is to pay for your new car or truck in cash, but few can do that in today’s economy. In fact, a U.S. News and World Report article confirms, “85 percent of new car purchases and 53 percent of used car purchases involve an auto loan,” according to Experian. Most people finance their vehicles, so you’re not alone. Still, you must understand how the financing works in order to ensure it doesn’t cost you more than it should.
You finance the purchase price of the car plus loan interest throughout the loan’s term. Using U.S. News’ example, imagine you finance a new car that costs you $25,000 for five years. Your interest rate is 4.5 percent, which makes your monthly payments $466. Now, do the math. Making this payment for five years increases your new car’s initial price to $27,960, so your car actually costs you almost $3,000 more than you thought it would.
2. Understand Your Credit Score
You should also have a clear understanding of your credit score before you head to the dealer. Bankrate cautions car buyers that some dealers will tell buyers their credit is worse than it actually is so the dealer can place the buyer into a higher interest rate bracket. Know and understand your credit score before you shop for a car. Run a free annual report with Experian, Equifax, and TransUnion, because each agency might rank you differently.
3. Understand the Negative Marks
Aside from running your reports to check your score, another advantage of doing so is to check the reports themselves. If there is anything negative on there that isn’t accurate, contact the credit reporting agency to have it corrected. Once corrected, your score should go up. If the negative mark is accurate, prepare to explain the ding to the lender. You can still get auto loans in Ontario and elsewhere with bad credit, and if properly prepared, you may secure a better interest rate than you thought you would.
4. Understand the Deal
Once you’ve found a car or truck to purchase and sit down to negotiate, do not take anything for granted. Read the fine print of all contracts and ask any questions you might have, no matter how insignificant they might seem. You don’t want to find out down the line that you cannot pay off your car loan in advance without having to pay a prepayment penalty, nor do you want to pay off your old car alongside your new car and, yes, some dealers accept your trade-in only to refinance its balance into your new contract.
Although hardly entertaining, read the proposed loan documents from the first page to the last to make certain you understand everything they say. If you have any questions at all, ask them. If you don’t like the answer, don’t sign the documents. If you don’t like the loan terms, don’t sign the documents. Never go into auto financing blindly. This can hurt you in the end, so make certain you understand your deal completely.
5. Understand Your Payments
No, this doesn’t mean understand that you’ll pay $350 for the next seven years. Understand how your payments fit into your monthly budget. In fact, make certain you understand this first. Do not shop for a car until you know how much you can pay, and this isn’t just monthly. You should know how much you can afford overall. Can you afford a $25,000 vehicle or a $15,000 vehicle? Look at the car’s price, not just what it will cost you each month.
This being said, look at what you can afford monthly as well, but make certain the payment fits comfortably into your budget. Do not overextend your budget or you will find yourself unable to make your car payments, and this is what gets you into trouble in the end. If you fail to make your payments on time, you will receive a negative mark on your credit report, which will lower your score. Bottom line: Don’t get yourself into financing you cannot pay off.