More and more Americans are struggling to keep up with their car payments. In February 2019, the Federal Reserve Bank of New York reported that more than 7 million people are three or more months behind on their car loans.
That figure might make you think twice about heading to your local dealership for a new vehicle.
But don’t let fear keep you from obtaining a car. Just rely on these tips for making smart auto financing decisions.
When you head to a car dealership, it’s best to already have a method of financing in mind.
David Haas, CFP , advises, “Financially, the best way to buy a car is to buy it new with cash and keep it for a long time, preferably 10 years or more. You can get the best price, you don’t pay any interest, and you can sell it at any time.”
Of course, this isn’t always feasible for everyone. That’s why many people turn to loans instead.
The dealership can offer you a loan, but it’ll likely be more expensive than other options. This is because dealerships often add in lots of extra fees. What are the alternatives?
Consider contacting the following institutions for an auto loan:
Credit unions offer great deals, but that doesn’t mean you should skip the other options. You’ll want to take your time and do a bit of research here and compare the APR and duration of each loan.
Research your own credit score as well. A low score can affect your ability to find a fair deal. Consider raising your score before trying to get a loan. This bit of advice applies to all loans, not just auto loans!
Going with the dealership’s loan offer, after all? Keep these tips in mind:
No matter how you get your loan (or even if you end up paying in cash), negotiating with the dealer is a crucial part of the car-buying process. If you’ve already arranged to get a loan from a different source, it’s easier to focus on negotiating on the sticker price when you’re talking with the dealer.
Here are three negotiating tips:
One final tip for your auto financing – no matter how you go about it: “Many financial experts recommend keeping total car costs below 15% to 20% of your take-home pay. So while your car payment is 10% of your take-home pay, you should plan on spending another 5% on car expenses,” says Philip Reed of NerdWallet.
If you’ve already agreed to an unaffordable car loan, you can still take steps to improve your situation.
According to Eric Hoffman, spokesman of the non-profit AWARE, “It’s tough to confront that you don’t have enough money, but if you don’t, you can compound it.”
So, here’s how to get out a car loan you can’t afford:
This is when you voluntarily return the car. And it’s one of your worst options. It’s the same as repossession – although you won’t be charged a towing fee. Your credit score will take a hard hit.
Tell the dealership you’d instead trade your vehicle in for a cheaper model. This demonstrates a level of loyalty to your dealer, and it helps you both avoid the repossession process.
Request an extension to your car loan or ask for lower interest rates. This isn’t always an option – especially if the car’s value is less than what you owe on it.
Consider selling the car and then using the funds to pay off the loan. Similarly, you might be able to find someone else who can take over the monthly payments. Of course, they’ll be taking the car, as well. Ask your lender if this is a viable option.
Raven’s genuine interest in behavioural economics and her expertise in psychology, acquired during her Master of Professional Studies (MPS) in Applied Behavioral Economics at Dyson Cornell College of Business make her the perfect candidate to approach all the personal finance topics through the perspective of an individual’s psychology.