Making wise decisions when picking a car loan

Laura T. Coffey • Profile • E-mail

Want to save thousands of dollars on your next car purchase? Then do whatever you can to pay cash for the car – ideally a well-built used vehicle. By taking this route, you’ll avoid years’ worth of finance charges. What’s more, someone else would have taken the hit for the worst of the vehicle’s depreciation for you.

But if the all-cash scenario just isn’t an option, the following tips will help you protect yourself when taking out a car loan.

1. Eat a good meal. Sound like a crazy tip? It isn’t when you consider how much a visit to a car dealership can wear you down. If you progress all the way to having a contract drawn up, the experience can last up to four hours.

2. Qualify for independent financing. It’s a common mistake to think that the dealership needs to arrange your car loan for you. Before you show up at the dealership, get pre-approved for a car loan elsewhere. That will elevate you to the status of a “cash buyer” who can concentrate on negotiating the price of the car.

3. Know where to look. You can go to Bankrate.com to scan interest rates being offered by a variety of lenders. Some lenders promise to give you an answer within 15 minutes by phone or e-mail at no obligation.

4. Find out your credit rating. Arm yourself with this information to make sure you’re getting a fair interest rate. You can request a free copy of your credit report by visiting http://www.annualcreditreport.com/ or calling 1-877-322-8228 toll-free.

5. Keep it simple. It’s easy to persuade yourself to spend more than you planned once you get to the dealership. Instead, set a reasonable price limit ahead of time and stick to it. (All of your car-related expenses, including gasoline, should cost a maximum of 20 percent of your monthly net income.)

6. Know what cars cost. Another way to save is to have reasonable prices fixed firmly in your mind. Pricing information and reviews are available through Kelley Blue Book, Edmunds.com  and Consumer Reports.

7. Unbundle the transactions. Insist that the car dealer break the deal down into three distinct transactions: the price of the car, the financing terms (if you get your loan through the dealership) and the trade-in value of your current vehicle. It’s much too easy to get confused otherwise.

8. Do the math. Many dealers will give you a choice between, say, zero-percent financing or a rebate. Don’t immediately assume that the zero-percent loan is the best deal. Make the dealer chart out both scenarios for you.

9. Steer clear of long-term loans. It’s also becoming common for dealerships to offer six- and even seven-year loans with low monthly payments – but watch out. The car could depreciate in value dramatically well before you pay off that loan, and the warranty is likely to expire within three or four years. You could get stuck making payments on a car you no longer have or want.

10. Ask about penalties. Find out whether you will be hit with any fees if you pay the loan off early.

Sources:

• Edmunds.com (http://www.edmunds.com/)
• Consumer Reports (http://www.consumerreports.org/)
• Bankrate.com (http://www.bankrate.com/)

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