Financing a new or used vehicle can be a harrowing process for an amateur. Strong sales tactics, confusing documents and aggressive sales personnel can all be intimidating. The best way to find financing when purchasing (or refinancing) a car is to compare options, ask lots of questions and never, ever sign before you're completely sure of and comfortable with the terms of an auto loan.
Credit
The major determinant in most auto loans is a borrower's credit score. Make sure exactly what range you fit into before applying for financing (see Resources). If you have FICO score over 720, you should qualify for all top-tier rates and programs (so long as your income will support the loan). In an up or down market, a 720 FICO score should never qualify you for a rate higher than 7 percent and usually much lower. As for lower scores, it's often up to the discretion of the lender or dealership. Compare rate offers side by side and ask pointed questions of lenders who charge noticeably higher rates than competitors.
Different Sources
Most dealerships and car lots have lenders with whom they work exclusively for auto financing. Check offers with credit unions and local banks---both of which may offer more favorable loan terms. Be sure, while in negotiations with a lender, to focus specifically on lowering the total cost of the vehicle, not the monthly payment. Think of negotiations as a step by step process. First, select the vehicle (make sure it's in your budget and fits your needs); next, negotiate a total price (including all extras); last, attempt to finagle with the monthly payment by adjusting the term (length) of the loan.
Check Third-Party Sources
When comparing rates and payments, do outside research. Do research online for similar vehicles and check to see the going rate (sticker prices). Also, check the Kelley Blue Book valuation site (see Resources) to make sure you're not being overcharged for the vehicle. Make sure to double check the math---do your own DIR (Debt to Income) calculation. For example, if you make $3,000 a month (before taxes), and your total monthly obligations (including a proposed monthly auto loan payment) equal $1,400, your DIR ratio is 47 percent---high, but not unmanageable. You'll want to strive for a DIR below 50 percent. Many lenders allow DIRs to exceed 50 percent, so it will be your responsibility to ensure you can repay the loan.
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