Continuing from my previous article on steps towards financing a car correctly, I will now cover what other things to consider when financing (auto loan) a purchase of a new/used car.
Step 5: Look for cars – both listed by Private sellers as well as dealerships.
I’m not going to get into how to find a good car, but more so finding the right price on the car you think you can afford now. While it may be a common choice to first check out dealerships, where admittedly financing deals can be amazing occasionally – especially pre-tax season or sales on year old models – private party sellers have more room to bargain. You can avoid the salesperson showbizz you may be presented with at a dealership and discuss better terms and conditions with a private seller.
As a rule of thumb, always approach a Private seller informing them you plan on financing the purchase and furnish details of the terms you discussed with the bank. It could be beneficial to carry the pre-approval papers with you towards negotiating a price. Additionally you can avoid those expensive “dealership documentation charges” and just incur the registration+tax charges.
You can sometimes get better deal when you pay cash. If you have a loan, don’t say its a cash purchase. It helps with negotiation as cash is upfront and immediate while payments may not have much value in the future (inflation effects).
Step 6: Shop insurance BEFORE you buy the car
Let’s say you want that amazing new BMW 3 series fully decked out costing you $56,000 and you know you can afford it with that $100,000/year salary over a three year period. But did you think about how much insurance will cost you in those three years?
Depending on the brand of the vehicle, its age (new/used), its safety features and historical data on both you as well as the car (and prior versions/models), insurance numbers can be all over the place.
A new car is always more expensive to insure as it is worth a lot more than a used car. A car with automatic braking is more reliable than one without and all of these factors bundled together can cost a lot.
Financed vehicles REQUIRE full comprehensive coverage insurance as the bank too has a split ownership of the care and wants to protect its collateral. You will necessarily need to furnish proof of complete comprehensive insurance to bank otherwise they will retract your loan and seize vehicle / not agree to finance in the first place. Prior Speeding tickets/DUI can raise insurance rates.
So in addition to the monthly payments, you may also have to pay $500/mo in the duration of ownership of the car with the rates rising or dropping – and nothing you can do about it.
Its always safe to account for those costs as your finance terms will not include those costs but will require you to fully insure the vehicle.
Questions and Answers to consider
As part of my research, I did also ask what would happen in the worst of situations-
Q: What if a person misses one of the payments?
A: A late charge will be applied to the account which the borrower has to include in their next payment. Repeated offences or signs of delinquency will flag the account and the car could be seized by the bank.
Q: What if the person defaults and reports it to the bank?
A: The remaining debt on the car will be sold off to a collections agency which will try to make money on that debt. This cycle will continue until someone pays off the debt (even if in part).
Q: What effect can an auto loan have on my account?
A: An auto loan opened in your report will count towards a new open account with recorded fixed monthly payments (not the same as a credit card). Upon final payment of the loan in full, the account will be closed and recorded as “Payment received in full” for the upto 7 years after which it will fall off your report.
You may incur an initial score hit, but based on your credit diversification, this number drop can be relatively small or major.
For example: if you’ve have 12 credit card accounts averaging 2 years of history with on-time payments and your FICO score was 790, it could drop to 780 but will eventually go back up. However, a score of 720 with only 2-3 accounts over the same period of time, could risk you go as low as 650>. It’s all math and how many data points of on-time payments across various accounts you can effectively provide help you in the long run.
Not to mention the higher APR costing you $1000s in interest payments.
Q: How do I avoid any effect on my credit score when buying a car?
A: Buy the car in full using cash! No other way around it.
So that is all I found in my research and I hope my work helps you, your family/friends out. Feel free to share the article(s) and the work we do here as it’s all done to make life easier for you! I certainly learnt a lot in the process and can say for sure am much better off now knowing the steps I have taken today to ensure I don’t spend extra tomorrow!