Car Loan Interest Rates: What’s Good?
on Jan 07 in Financing tagged Financing by jasonl
Generally speaking, the best interest rate you can hope for on an auto loan is about ½ percent less than the prime rate. (Find out what the prime rate is if you’re not sure.) But before you go out and look for a interest rate that’s ½ percent less than prime, you’ll need to consider a few things:
Listen To This Article:
Your Credit History. If you have a history of late payments, unpaid debts, collections, civil judgments, defaulted loans, or bankruptcy, you’ll most likely end up paying a higher interest rate. If you’re not sure about your credit history, get a copy of your credit report, read through it carefully, and then take care of any problems that you may have. Take a look at our tips on how to fix your credit for more information if any of this applies to you.
Your “Available Credit” Ratio. Even if you have a better-than-average credit history, you can still end up paying a higher interest rate that you should if your available credit ratio is out of whack. What’s an available credit ratio? Lenders add up all your available sources of credit – your home equity loan, credit cards, etc. – and they compare it to how much debt you have. If you’re using more than half of your available credit, lenders will often give you a higher interest rate because you fit the profile of a person that’s living on credit. If you want to improve your available credit ratio, either pay off your debt (hard) or get more credit (easy).
The Type Of Car You Want To Buy. The older a car is, the more interest you’re going to pay. A one- or two-year-old car will usually qualify for the same rate as a brand new car, but once vehicles start to get older then that you start to see the interest rate go up. Once a vehicle reaches ten years of age, the interest rates explode.
Also keep in mind that the higher the mileage on a car, the higher the interest rate will be. Most lenders charge a steep interest rate for cars with more than 80,000 miles, and many don’t even offer financing for cars with more than 100,000 miles. The reason? Once cars get that high in mileage, they’re more likely to suffer a major break-down. Many people, when they realize they can’t afford to fix a major repair, simply stop making payments. The bank wants to avoid this scenario so they charge a high interest rate to discourage you from buying a high-miles car.
So what does this all mean? When you’re trying to figure out what a good interest rate is, you need to consider your credit history, take a look at your available credit ratio, and consider the type of car you want to buy. The smartest thing that you can do is to get financing quotes online. We like online quotes because they’re easy and fast, and they help you find out what is the best interest rate for your situation.
As always, take your time when buying a new or used car. Do your car research, get multiple car financing quotes, and feel free to contact us with your questions.
Dealer Financing Basics: What To Expect
on Nov 19 in Financing tagged car dealer tips, Car Dealer Tricks, Financing by jasonl
When it comes to buying a car from a dealership, it’s important that you know about some of the things they are going to offer you in the finance office. Here’s a basic explanation of each.
First, they’re probably going to try to sell you a vehicle extended warranty or service contract. Both have saved people lots of money, and they’re a good idea in some instances. However, they are usually overpriced at the dealership, so make sure you shop around.
The finance office will also offer you GAP protection (also called Gap Insurance). It’s usually fairly inexpensive (about $5-10 per month). GAP protects you if your car gets totaled – if your car is totaled, your insurance company will not pay you what you owe on your car – they’ll only pay what they think the car is worth. If you’re in a situation where your car depreciates faster than you can pay it down (which is a situation about 90 percent of Americans find themselves in, especially when they buy brand new cars) and your car gets totaled, you can end up with a large difference between your loan amount and what your car is worth. In other words, if you’re financing, you should seriously consider GAP insurance.
The finance manager may also offer you a security system of some type. You’re not likely to get a decent security system at a dealership, new or used. If you want one, you’re better off going to your local Best Buy, Circuit City, etc. They have good security products their and they often offer free installation. They’re also less expensive than the dealership.
The finance manager will also offer window etching, and it is a total rip-off. The dealership will etch either your VIN number or some identity number into each piece of glass on your car – it’s a great concept, but the value of the product is only about $30-$40. Unfortunately, dealerships charge anywhere from $99-$800. It’s a bad deal and I suggest you avoid it unless you can get it cheaply (or free).
The finance manager may also offer you a “clear bra” or clear hood protector. This is a good idea – if it’s a quality product that’s correctly installed, it will protect the front of your car from damage. But, like most things the dealership will try to sell you in the finance office, it’s probably overpriced. I’d suggest you negotiate the price with them, but a “clear bra” is definitely worth buying.
The dealership will also offer you something called credit insurance. The basic concept is this: if you die or you become injured or disabled, credit insurance steps in and makes your car payments for you or pays your loan off. This is a bad deal. If you really want this type of credit protection, call your local insurance provider and get it from them – they’re going to give you a much better deal than the dealership will.
The bottom line with all these products, and any other deals they might offer you, is this: You should consider everything the finance manager offers you – 90 percent of it is valuable and worthwhile. Just remember that most of the products he or she offers you will be overpriced. They’ll probably try to charge you much, at least much more than you can get elsewhere, so your strategy should be to tell the finance person, “I want it, I really like the idea, but I want to sleep on it, so can I call you back next week?” This gives you a chance to shop around, and you’ll most likely get a better deal somewhere else.
As always, take your time when buying a new or used car. Do your car research, get multiple used car financing quotes, and feel free to contact us with your questions.
Buying A Car On A Budget
on Nov 19 in Financing tagged Financing by jasonl
It’s best to work out precisely how much you can afford to spend before you leave to go car shopping. When it comes to buying a car, it’s very important that you set a budget and stick to it. Before you begin your transaction, you should have a maximum price set. If you find a vehicle you like, but the price is over the maximum, you need to know how to walk away.
You can go over your budget the old-fashioned way, with a calculator and your bank and credit card statements, or you can use the income and price range budget calculator on our website.
Remember that a budget is a dollar amount, not a monthly payment. One of the worst things you can do is walk into a dealership and say, “I want to pay $350 dollars per month.” Dealership people are very creative, and they’ll figure out a way to make a car that’s way too expensive cost $350 dollars per month. In the short run it will make you happy, but in the long run it will hurt you most of the time.
If you have a monthly payment in mind, and you don’t know what price it will work out to be, we have a calculator for that: the price range budget calculator, and it will tell you what price range of vehicle you should be looking at.
Here’s a fairly easy system if you’d rather to do the math yourself. Figure out what you can afford to pay per month, and multiply this figure by 36, 48 or 60 (3, 4 or 5-year loans). Add what you can afford for a down payment. Finally, subtract 12-20% of the total for sales tax and finance charges.
Once you set your budget, stick to it. If you find a nice car that meets all your requirements, but it’s $2000 too much, walk away. You’ll find another car.
Here are some questions you should ask yourself to help make the car-buying process a little easier:
- What do you like and dislike about the vehicle you currently own?
- Do you want a lot of passenger space?
- Do you want two doors or four?
- Do you prefer a Standard or an Automatic transmission?
- How much does status mean to you?
- What about fuel economy?
- Are you willing to settle for a well-maintained used car, or is your heart set on buying a new one?
- How much can you afford to spend?
As always, take your time when buying a new or used car. Do your car research, get multiple used car financing quotes, and feel free to contact us with your questions.
Car Buying Tips: Get Your Own Car Financing
on Nov 19 in Financing tagged car buying tips, Financing by jasonl
One of the best things that you can do if you’re buying a car is to get your own financing. There are a few good ways to do it, but one of the best ways to go about it is to get multiple quotes. The more quotes you get, the more options you have. There can be a lot of variance in the quotes, and every lender has its own scoring system: some lenders will give you points for being a college graduate, others will give you better terms because you had a good account with an affiliated company, etc.
It’s also a good idea to get multiple quotes and have your own financing available because it gives you power. If you have your own financing available, you can use it as leverage to get a better rate at your local dealership. If you walk into a dealership and you don’t have any financing lined up, you don’t know anything about your credit, etc., they might be able to convince you that you have bad credit when you really don’t, and they might be able to charge you 3 or 4 percent more in interest than you can get otherwise.
But remember when you get your own financing that dealerships tend to have the best lending rates. By using the quotes you get on the internet, it might be easier for you to get a special rate or a discount. The dealership is likely to have millions of dollars in loans, and the bank will be more willing to work with the dealership for a special interest rate than they would an individual who has only one loan for a few thousand dollars. That’s why it’s a good idea to get your own financing lined-up on the internet, you can still finance at the dealership, but you can use your outside quotes as a bargaining tool.
In addition to using our recommended car financing quote services, you should also consider calling your local credit union. Sometimes credit unions offer better interest rates, and they’re a good resource you should check into.
Before you look for financing, you should:
- Review your family’s finances to find out just how much you can afford to spend. You can use our budget calculator and read more about figuring out how much car you can afford.
- Make a list of all the vehicle features you will really need.
- Keep in mind that the car’s sticker price does not mirror the full cost of owning a financed vehicle
Securing reasonable financing is easier than ever in today’s changing consumer market, with increasing competition between car dealers and financial institutions. Pre-shop for the car that fits your budget – use the library, the Internet, your neighbors, competing car salesmen – every available means to learn who is offering the lowest financing and interest rates.
As always, take your time when buying a new or used car. Do your car research, get multiple used car financing quotes, and feel free to contact us with your questions.
Used Car Financing Basics And Tips
on Oct 01 in How to Buy tagged Financing, Used Cars by jasonl
If you’re like most Americans, you’ve decided to arrange financing in order to buy a car. There are lots of different lenders and financing options, but for the most part all used vehicle financing follows the same basic rules:
1. Used Car Financing Rates Are Higher
Used vehicle interest rates are higher than new vehicles for a few reasons, but the main reason is that used vehicles represent more risk to the lender. Used vehicles are more likely to suffer a major mechanical failure that could render them worthless (like a engine replacement, or instance).
2. It’s Harder To Get Financing For A Used Car Than A New Car
It’s much harder to acquire used vehicle financing than new vehicle financing, and the reason is really simple. New car manufacturers (like Toyota, Ford, Chevy, etc.) want to sell cars, so they’ll provide special financing to people to help them be able to buy. Additionally, new vehicles often come with rebates and/or special interest rates. If you have less-than-perfect credit, it might make sense to buy a new car.
3. Used Car Financing Is More Restrictive
Typically, most banks will not lend money on any used vehicle that has more than 100k miles or is more than 8 years old. These higher miles, older vehicles represent much more risk for the lender because they’re more likely to suffer a major breakdown. Older vehicles are also more likely to be stolen and “chopped up”, making recovery impossible. NOTE: If your credit is less-than-perfect, lenders will probably restrict you to a vehicle that’s not more than 5 years old and/or one that has less than 75k miles.
4. Credit Unions Are Great Used Car Lenders
In just about every case, your local credit union will offer the best financing for a used car. I strongly recommend you join whatever credit union you can. Credit Union interest rates are usually excellent, and they are much more likely to provide Often times you can join a credit union through your work (your HR department should know about this). If not, many credit unions allow people to join based on the neighborhood they live in. Search for a credit union to join here.
5. Leasing A Used Car Is Usually A Bad Idea
In my entire career, I have never seen a used car lease that made financial sense. Typically, used car leases are structured just like new car leases. There’s an upfront payment, a low monthly payment, and a low mileage limit. Unlike new car leases, however, every used vehicle lease I’ve seen had $500-$1,000 in extra fees. Finally, used vehicle leases aren’t usually substantially less expensive than a comparable new vehicle lease. For all these reasons, plus the fact that most used vehicle leases don’t protect a customer the way a new vehicle lease does, I don’t recommend anyone lease a used car.
For more information, check out our section on New and Used Car Financing.
Figure Out Your Budget
on Sep 06 in What to Buy tagged budget, Financing, payment by jasonl
So you’ve got an idea of what you want, but how do you figure out your budget? There are a few different ways to do this, but the most important thing to remember is that once you set a budget, you should stick to it. If you take the time to figure out what’s affordable, it would be a waste to ignore it.
Here are some different methods for figuring out your budget (If you like, you can skip all this reading and just get pre-qualified now, but what’s the fun in that?):
1. Are you paying cash, or do you want to finance?
If you’re paying cash, it should be simple for you to figure out what you can afford — just make sure to leave yourself enough cash for emergencies. If you’re financing, the first step is to figure out how much of a monthly payment is affordable. The quickest (5 minutes or less), and easiest way to do this is to grab a pen, a blank sheet of paper, your last pay stub, and a calculator. Go ahead — we’ll wait for you. Got it? OK.
Now, start writing down your monthly expenses in a column from top to bottom. Make sure you include rent/mortgage, other car payments (if you have another car), student loans, home equity loans, 2nd mortgages, etc. These are all of your big, fixed expenses. Don’t include your current car payment — leave it off the page. Next you should write down child care expenses, credit card payments, cable, phone, utilities, and any other regular monthly bills. You also need to write down your monthly food, entertainment, and other expenses. If you don’t know how much these are, you should go through your checkbook or online bank statement and add them up from the last full month. Finally, make sure you write down how much money you want to save every month, as well as how much you want to use for making extra payments to pay bills off early.
Once you’ve written it all down, add it up. Compare the total to your monthly income after taxes — if you’re not sure how much that is, you can figure it out from your pay stub. Subtract your expenses from your monthly income and you end up with the most payment that you can afford. (If it’s is a negative number, you either did the math wrong or you spend more than you make each month.)
2. How banks figure out how much payment you can afford.
Most banks don’t have any idea what your expenses are, so they use an average to figure out what you can afford. To figure it out like a bank would, you take your gross monthly income (that’s the amount of money you get paid before taxes), and multiply it by 15%(you can use our Payment To Income Budget Calculator and skip the rest of this explanation if you want to). According to just about every bank in the US, that amount is the most you can afford to spend each month on all of your cars combined. So, for example, let’s say you earn $3k a month before taxes. 15% of $3k, is $450 dollars. According to most banks, the most you can afford to pay for a car is $450 a month. Keep in mind that number includes all your car payments, so if you have a motorcycle, an ATV, a boat, etc., the amount of that payment is subtracted from the total. This method, called the payment to income method, is a good way to figure out the most you can afford. However, method one is still the best way to make sure you get it right. If you take the time to figure out your budget now you’ll be happy in the long run.
3. How to figure out how much you can afford to finance.
Using the smaller number from methods 1 and 2, you should come up with your ideal monthly payment. Once you know how much of a monthly payment you can afford, it’s pretty ease to figure out how expensive of a car you can afford to buy (you can use our Price Range Calculator and skip the rest of this explanation if you want to). Take the amount of your ideal monthly payment, and using your calculator, divide it by 25. Then, multiply by 1000. That amount is the bottom end of your spending range. Now, clear the calculator and repeat the same step, but this time divide the ideal monthly payment by 20 (instead of 25). That’s the top end of your spending range. For instance, a $300 ideal payment gives you a spending range of $12-$15k dollars. You should only look at vehicles with an asking price of $15k or less if you want your payment to be $300 a month. As long as your credit is good and your sales tax is normal, this method works pretty well. Of course, the easiest way to figure all this out is to…
4. Get Pre-Qualified.
We can’t emphasize this one enough — regardless of your credit situation, regardless of your financial circumstance, there’s absolutely no good reason NOT to get pre-qualified. You can call your bank, your credit union, or you can use our recommended online quote services to find out what you can afford, what interest rate you’ll get, etc. We suggest everyone get pre-qualified as early in the process as possible. This way, you won’t waste time looking at the wrong vehicles, and you don’t have to feel nervous about your financing while you shop. Filling out an online quote form is easy and fast, and we highly recommend it. If you don’t want to do it online, call your local credit union or your local bank. They have people their that will ask you some questions, check your credit, and give you a good estimate. Going online is the fastest method, and you can also get multiple quotes online fairly quickly. Calling multiple banks on the phone takes much longer.
