Considering a car loan? Eric Rosenberg, a former loan manager at a bank, shares information you need to know before you take out a loan.
I remember the first time I drove home in my new car. That new car smell. The freedom to drive wherever I wanted. The knowledge that I owed $12,000 to the bank… People buy new cars all the time, but they rarely spend the time to really understand how their loans work before buying their new ride. Here are five important things to know when picking an auto loan.
Your Interest Rate Matters
There are three factors in determining your loan payment and the interest expense of your loan: the loan amount, the number of years, and the interest rate. Due to your financial circumstances, you may not have much of a choice on the amount other than deciding which car to buy. You can chose from common loans like 3 year or 5 year as well. A lot of people don’t know that you can also shop around for a better interest rate. Interest rates are determined by a few factors. The overall trend of rates is determined by the Federal Reserve Bank, and those rates are passed on to you, plus a margin for profit, by the bank. Credit unions often have lower interest rates than commercial banks. Shopping around will help you find out where you can save the most.
A Car Loan Impacts Your Credit Score
To qualify for the best interest rate, the bank will look at your credit score. Once you have the loan, your loan payments will affect your credit score for the life of the loan plus seven years. Making on-time, regular payments on all open credit lines is the biggest factor of your credit score. It takes years of on-time payments to get a great score, but only one or two late or missed payments and it will plummet. As you just learned getting your new car loan, that difference can cost you a lot of dollars over the life of a loan. Imagine the impact a credit score has on a mortgage loan for hundreds of thousands of dollars!
Make as Big of a Down Payment as Possible
If you put down more when you buy your car, your monthly payment, and total interest cost, will be less. Check out an auto-loan calculator to find out exactly how much you would save by making a bigger down payment. Making a bigger down payment also helps you to qualify for the loan. Banks use something called loan-to-value when making car and home loans. The more equity you can put in, the lower the bank’s loan-to-value will be, making the loan less risky and an easier decision for the bank.
You Can Make Payments Any Time
When I got my loan, I first thought I could only make my one monthly payment and that was that. I knew I could put extra money into my payment to pay my loan down faster, but thought it had to be in one lump payment. I was wrong! I quickly learned that I could make two payments per month of 50% of my monthly payment amount. Doing that helped match my income to my paydays and paying every other week instead of once a month means you make 26 payments each year equivalent to 13 monthly payments, or an extra monthly payment each year. Those extra payments add up quickly, and paying a little extra into the loan twice a month helps it go down in no time. With that strategy I paid off my student loans in two years and I paid off my 5 year car loan in about 2 years on my current car.
You Can Pay Your Loan Faster with RelayRides
Sure, he can afford making double payments each month but I can’t. Is that what you’re thinking? Think again. My car loan had a payment of about $250 per month, which happens to be what the average RelayRides member earns each month by renting out their car. You can list your car today and earn a little extra cash to pay down your car loan faster, or cover the payment completely. Join all of the other happy, and profitable, members and your loan will be paid off in no time.