Auto Loans: What we should have learned in school but never did.

When you’re shopping for a new auto loan or lease, it’s important to know the right questions to ask. Preparing can help you save you money and reduce stress by avoiding future issues with your auto loan.

What school never taught us about purchasing a vehicle:

Tip #1 - Determine your up-front costs

Your total loan cost starts with the amount financed. The amount financed is the amount of money you are borrowing. It includes the price of the vehicle, taxes, and other government fees, as well as any add-ons like extended warranties and optional credit insurance, minus your down payment and trade-in amount. The amount financed does not include the cost to borrow the money. That cost is known as the finance charge and includes interest and certain fees over the life of the loan. Your total loan cost is the amount financed plus the finance charge.

Tip #2 - What fees are negotiable

Negotiate to lower the overall cost, not the monthly payment. Many people think about a loan in terms of the monthly payment. Be careful here. If you reduce the monthly payment by taking out a longer loan, you may pay much more in interest. The total cost of the vehicle financing matters. By negotiating for better terms on your loan, you can reduce the total amount of money you pay over time. For example:

  1. Getting a lower interest rate and APR means you will pay less to borrow money. The total cost of your loan will be lower.

  2. A shorter loan term (in which you make monthly payments for fewer months) will reduce your total loan cost. A longer loan can reduce your monthly payment, but you pay more interest over the life of the loan.

  3. A higher down payment, or a higher price for your trade-in, will reduce the total amount financed because you will have to borrow less money.

  4. Optional “add-on” products like extended warranties, GAP insurance, or credit insurance that are added into your loan amount will increase your total cost because you will be borrowing more money. Think about the "add-on" - Do you really need it? Look up these features prior to going to a dealership to get a better understanding of what they actually are and/or cover.

When negotiating for your loan, make sure you keep track of all the factors that affect the total cost. If you are negotiating the interest rate, make sure that you also know the length of the loan and other terms. Comparing total loan cost will help you keep an eye on these multiple factors.

Tip #3 - If trading in your current vehicle - research its approximate value prior to purchasing your new vehicle

You can look up the value of your vehicle using online commercial websites such as Edmunds, Kelley Blue Book, and NADA Guides. Finding examples of similar vehicles that have sold recently in your area will help you figure out a fair price.

Once you know how much your current vehicle is worth, you can decide whether to trade it in or sell it yourself. If you trade it in at a dealership, you and the dealer will decide on the value that will be credited towards the purchase price of your next vehicle. If you sell it yourself, you can use the money you get as a down payment.

If you owe more on your current vehicle than it is worth – referred to as being “upside down” – then you have negative equity. If you roll the balance of your existing auto loan into your new auto loan, this could make the new auto loan much more expensive. Your total loan cost may be much higher because you will be borrowing more than just the price of your new vehicle.

Make sure during any negotiations that you consider whether you are getting fair value for your trade-in and whether you are able to fully pay off the old auto loan.

Tip #4 - Explore loan options but understand how loan shopping impacts your credit score

When you apply for a loan and the lender checks your credit, a credit score is created for the lender. Depending on the credit scoring model used, generally any credit inquiries that took place within a 14 to 45-day time span will only count as one inquiry. So it’s a good idea to do your loan comparison shopping within a short time period to minimize any negative impact on your credit score.

Tip #5 - Know what you are signing

Before you drive off, make sure everything matches what you agreed to when negotiating. Once you have finalized the negotiations, review all of the paperwork before signing the loan documents. The federal Truth in Lending Act (TILA) requires lenders to give you specific disclosures in writing about important terms before you are legally obligated under the loan. One purpose of TILA is to help consumers make apples-to-apples comparisons between loans. The important terms include:

  • Annual Percentage Rate: the APR is the cost of credit expressed as a yearly rate in a percentage.

  • Finance Charge: cost of credit expressed as a dollar amount (this is the total amount of interest and certain fees you will pay over the life of the loan if you make every payment when due).

  • Amount Financed: the dollar amount of credit provided to you (this is normally the amount you are borrowing).

  • Total of Payments: the sum of all the payments that you will have made at the end of the loan (this includes repayment of the principal amount of the loan plus all of the finance charges).

The TILA disclosure will also include other important terms such as the number of payments, the monthly payment, late fees, whether the loan has a fixed or variable rate, and whether you can prepay your loan without a penalty.

Take the time to review the details of your auto loan and look over the paperwork. If there are things you don’t understand, ask questions. You are signing a contract, and this is a major purchase, it is important that you understand what you are signing.

How can our firm help you?

After you take out a loan, you should receive an introductory message from the lender that provided the financing. This communication will include important information related to your loan such as where to send your payments and payment due dates. If you have issues making your monthly payments and there is a possibility your vehicle may be repossessed or your vehicle has already been repossessed, contact us to discuss your options.