Saturday, July 12, 2014
Inquirer Daily News

Car Loan Basics

If you are considering buying a car for the first time, you might not know where to begin. Making such a major purchase is most likely the first step in your financial life, so it is very important to take it seriously. Chances are, if you're planning to buy a car or truck, you're one of the overwhelming majority of car buyers that do their homework in advance of ever taking a test drive. You learn about options, colors, prices, and ratings. But would you think to check your credit score and research financing options with the same intensity? You should.

Your dealership or an auto lender will work with you to help you determine a financing arrangement that makes sense for you. But its always a good idea to have a solid game plan on financing before you ever set foot in a dealership. recommends following this three-step road trip to make the most informed financing decisions:

Your Financial Situation
Evaluate your financial situation and determine how much you can afford to pay. Do you have a budget? If you don't already have one, now is the time to create one. This will help you determine how much car you can actually afford (to estimate a monthly payment for the car itself, check out our payment calculator). Don't forget to factor in vehicle-related costs outside of the car payment, such as insurance costs. Insurance premiums for younger drivers can be significantly higher sometimes as much as the monthly car payment itself. Other costs to consider include gas, maintenance, and taxes, which can all be significant, especially if you forget to plan for them.

If you are jointly financing your automobile and one of you has excellent credit while the other is credit challenged, understand how the finance company determines your annual percentage rate (APR). For example, some finance companies will only judge a couples credit worthiness based on the better qualified applicant. With a good payment history, this could present a good opportunity to help the credit challenged spouse improve their credit history over time. Other finance companies, however, may determine your APR based on both applicants, in which case you may want to consider applying for credit only in the name of the more credit-worthy borrower to secure a lower APR.

Before financing or leasing a vehicle, make sure you have enough income to cover your current monthly living expenses. Then, finance new purchases only when you can afford to take on a new monthly payment. The Monthly Spending Plan is a tool to help determine an affordable payment for you.

The only time to consider taking on additional debt is when you're spending less each month than you take home. The additional debt load should not cut into the amount you've committed to saving for emergencies and other top priorities or life goals. Saving money for a down payment or trading in a vehicle can reduce the amount you need to finance. In some cases, your trade-in vehicle will take care of the down payment on your vehicle.

How Good is your Credit?
Have you pulled your credit report? Your credit history may affect the finance rate you are able to secure, so its a good idea to get a copy of your free credit report before heading to the dealer. This way, you'll know what creditors will see before they do. And it will give you a chance to try to correct any errors on your report.

How much should you pay?
Firstly, stay within the price range you can afford and research the pricing of your car to determine a realistic price range for the car you are thinking of buying. Have you shopped around? Do some homework before you decide which car to buy and where to buy it. Call your bank or credit union. Talk to multiple dealerships. Print out all quotes and keep them in a folder that you bring with you when you shop for the car. In the end, however, whether you finance through your dealer or elsewhere, there are typically no penalties to refinance if you're not satisfied.

Getting Financed
Do you know how finance rates are determined? Vehicle financiers use a number of factors to determine the finance rate they'll offer you. Typically, they review your credit score, which is based on an automated analysis of your credit history. Other factors that may affect the financing offer include: the price of the vehicle you would like to purchase, the availability of manufacturer incentives, the amount of your down payment, your debt repayment options, and the length of the finance contract. The rate you're offered may be negotiable. Always, compare annual percentage rates and financing terms from multiple sources such as banks, finance companies, and credit unions.

There are literally hundreds of thousands of sources of financing for automobile purchases, such as banks, credit unions, financing companies, savings banks, loans from stock brokerage firms, and home equity loans. This has created a highly competitive marketplace and lower rates for all consumers.



For the vehicle buyer, dealership financing offers:

1. Convenience Dealers Offer buyers vehicles and financing in one place.

2. Multiple financing relationships The dealerships relationships with a variety of banks and finance companies mean they can offer buyers a range of financing options.

3. Special programs From time to time, dealerships may offer manufacturer sponsored, low-rate programs to buyers.

How the process works


For each account, the credit report shows your account number, the type and terms of the account, the credit limit, the most recent balance and the most recent payment. The comments section describes the current status of your account, including the creditors summary of past due information and any legal steps that may have been taken to collect.




Do I need a co-signer?
Is there someone you could ask to be a co-signer if needed? If you're under 18, are currently not employed, do not have a credit history, or your credit history is not good, you may need a responsible person to co-sign the finance contract for you.

You may be allowed by the creditor to have a co-signer sign the finance contract with you in order to make up for any deficiencies in your credit history. A co-signer assumes equal responsibility for the contract, and the account history will be reflected on the co-signers credit history as well. For this reason, you should exercise caution if asked to co-sign for someone else. Since many co-signers are eventually asked to repay the obligation, be sure you can afford to do so before agreeing to be someones co-signer.

Sealing the deal
Negotiate your finance arrangements and terms just as you negotiate the price of the vehicle. Understand the value and cost of optional products such as extended service contracts, credit insurance, or guaranteed auto protection. If you don't want these products, don't sign for them. Always take the time to read the contract carefully before you sign it and ask questions about anything you don't understand.



Do you really know everything there is to know? Do you know the difference between leasing and financing? Know what an APR is? Credit insurance? Guaranteed Auto Protection? You need to educate yourself on these terms, and understand the value and price of aftermarket products. If you don't want something, don't sign for it. See the Auto Loan Glossary to define these terms.

After the purchase
Make your payments on time for late or missed payments incur late fees and appear on your credit report, which can impact your ability to get credit in the future. If you financed the vehicle, be aware that the bank, finance company or credit union that bought the financing contract from the dealership holds a lien on the auto title (and in some cases the actual title) until you have paid the contract in full. If you have difficulty making your monthly payments, talk to your creditors. Work out a repayment schedule and, if necessary, seek the services of a non-profit credit counseling agency. If you default, a creditor may take the auto in full satisfaction of the credit agreement or may sell the auto and apply the proceeds from the sale to the outstanding balance of the credit agreement. Be aware that repossession can occur if you fail to make timely payments. It does not relieve you of your obligation to pay for the auto. The law in some states allows the creditor to repossess the auto without going to court.

What about Leasing a car?



Another important consideration is the mileage limit most standard leases are calculated based on a specified number of miles you can drive, typically 15,000 or fewer per year. You can negotiate a higher mileage limit, but you will normally have an increased monthly payment since the vehicles depreciation will be greater during your lease term. If you exceed the mileage limit set in the lease agreement, you'll probably have to pay additional charges when you return the vehicle.


Finally, you will have to maintain insurance that meets the leasing company's standards. Be sure to find out the cost of this insurance.
