VEHICLE FINANCING
If you know you are going to finance your new or used vehicle, it is best to establish how much you can afford to pay each month before you head out to the dealership. Take a look at your finances and determine how much you can comfortably afford to pay each month and subtract $50 to $100 just in case.Then use a payment calculator to determine what your monthly payment will add up to in terms of a loan. DriveChicago has a simple payment calculator that lets you shop by monthly payment or total loan amount.
Given the current credit crisis, it is no surprise that consumers are wary of their lending options. Thankfully for new- and used-vehicle buyers, there are quite a few options when selecting a financing provider. Yes, it's more difficult to get approved for loans if you are a sub-prime candidate, but if you have average credit, a solid job, and a few thousand to put down, there's plenty low-rate financing available right at your dealership.
Many automakers are now offering 0% financing through the dealership. In addition, your new-car dealer also has direct access to many different financial institutions and may be able to offer financing through them. You'll want to know what incentives the automakers are offering before you head to the dealership. DriveChicago keeps track of current cash-back offers and discount financing on its Rebates & Incentives page.
In 2007, the average new vehicle sold for about $28,000. Bankrate.com reported at the end of 2007 that the average new-vehicle rate was about 6.9 percent for a 4- or 5-year loan. Put those two together and you can see that just about any vehicle purchase requires a serious financing commitment.
Dealers and other lenders rely firmly on your credit score when they approve financing. The higher your credit score, the lower the financing rate you're likely to be offered. Most people fall into the 600-800 range, but if your score is on the low end of the scale, you'll likely pay a substantially higher rate.
Avoid any lender that tacks processing fees or other extra charges onto the basic loan. Inspect all finance agreements carefully. Understand every figure, and make certain all calculations are correct. If figures don't come easily to you, bring along a friend to examine all documents. Here's what to look for on the form:
- Sale price: the amount you've agreed to pay for the vehicle.
- Down payment: the amount you've agreed to pay before taking delivery. The higher the down payment, the lower the loan amount and payments.
- Trade-in value: the amount the dealer is giving you for your old car. This could cover most or all of the down payment.
- Loan amount: the number of dollars you're borrowing to make the purchase.
- Annual Percentage Rate (APR): the percentage of the borrowed amount charged as interest each year.
- Monthly payment: the amount you'll have to come up with each month. Know exactly how and when each payment must be made.
- Payment period: the number of months you'll be making those seemingly endless payment.
- Total car cost: the sum of the monthly payments (including interest) and the down payment. This is how much the car will actually cost you, and it can be dramatically higher than the sale price alone.
Also, it is never wise to buy a vehicle with a "financing pending" contract. In some cases a dealer will allow you to drive off in a new vehicle assuming that your financing will get approved at a later date. In most cases, the financing does go through and everything is fine. However, there are times when either the lender can't approve the loan or the lender has to increase the financing rate. In those situations, you may be stuck paying a substantially higher monthly payment.
As a general rule, the longer the loan period, the lower the monthly payments. Though the payment is lower with a long-term loan, you'll end up paying more for the car in the long run. Another downside to long loan terms are higher interest rates.
In recent years there's been a trend toward long-term loans for new vehicles: 72-month and even 84-month loans. Here's an example of monthly payments and the total amount paid for a $7500 loan at 6.9 percent annual percentage rate (APR) for various loan periods:
No. of Months | Monthly Payments | Total Payments | Interest Paid |
12 | $661.11 | $7933.32 | $433.32 |
24 | $347.82 | $8347.68 | $847.68 |
36 | $243.77 | $8775.72 | $1275.72 |
48 | $192.03 | $9217.34 | $1717.34 |
60 | $161.20 | $9672.00 | $2172.00 |
When you finance, the final price you pay for your new vehicle is substantially more than the figure you agreed upon with the seller. The true cost is the amount you will have paid over the life of the loan taken to finance the car. That total depends upon the size of your down payment, the interest rate, and the number of months taken to pay off the loan. Obviously, you want to make the largest down payment you can afford and shop for the lowest interest rate.
