Auto Loans 101: 6 Things You Need To Know

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Auto Loans 101: 6 Things You Need To Know

 

Buying a car is a major investment for most people, second only to buying a home. And, much like the dream of homeownership, you need to do your homework to make the best decisions about your auto financing.

If you’re thinking about buying a new or used car, here are six things you need to know:

 

1. Credit score

Credit scores are a big deal. Lenders use them to decide whether or not to approve your auto loan and determine your interest rate.

You can get free copies of your credit reports from the three major credit reporting bureaus once a year by visiting www.AnnualCreditReport.com. A credit score of 700 or higher is generally considered good. If your score is not where you’d like it to be, here are four ways you can start improving your credit today.

 

2. Monthly Payments

Your monthly car payment is calculated based on three factors: how much you borrow, your interest rate and the term of your loan. Understanding how these work can help you make smart money-saving decisions.

Ideally, your monthly payment should not be more than 20 percent of your take-home pay, according to the consumer advice editor at Edmunds.com. Make sure you’re buying a car that you can truly afford by using their free auto loan calculator to plug in your loan factors and find out what your monthly payment will be.

 

3. Down Payment

A down payment is the portion of your car’s purchase price that you pay for up front and out-of-pocket. A good rule of thumb is to put down 20 percent.

The larger your down payment, the smaller your loan amount will be, translating to lower monthly payments and less interest over the life of the loan. However, if you’re among the 78 percent of Americans who live paycheck to paycheck, it might be tempting to make a smaller down payment or look for “zero down payment” offers. Do so with caution. You’ll end up borrowing more and risk getting upside-down on your loan (meaning you’ll owe more than the car is worth).

 

4. Interest rate

Auto loan interest rates are the highest they’ve been in nearly a decade with the rate on new vehicles in June 2018 averaging 5.82%. This is where your credit score becomes important. Consider this: The difference of one percentage point of interest on a $15,000 car loan over 60 months can save hundreds of dollars in interest over the life of the loan.

 

5. Loan Term

The loan term is the amount of time the lender gives you to pay off your car. You can save money on interest fees by keeping your loan term as short as you can afford.

But, if you’re like 4 out of 10 new car loan holders, you just might own your loan longer than you own your car. Last year, more than 40 percent of new car buyers had loan terms of 72 months or more.

 

6. Biweekly payments

While most loan terms are expressed in months, rather than years, you can also pay them back biweekly (meaning twice a month). This is another way to save money.

Biweekly auto loan payments shorten the term of your loan while reducing interest charges and accelerating equity. Even better, you can time them to coincide with when you get paid. It works using simple math.

Instead of making your required auto loan payment once a month, divide it in half and pay that amount every two weeks. Because there are 52 weeks in a year, you’ll make 26 biweekly payments over the course of a year (the equivalent of 13 monthly payments). On a monthly basis, your payment amount is the same. However, an extra month’s payment a year can reduce interest and shorten the term of the loan.

Use our free biweekly auto loan calculator to find out how much you can save by making biweekly auto loan payments.

Your dream of buying a car can become a reality if you do your homework, make smart decisions about how much you can afford and how you finance it and consider making biweekly payments.