Financial Fundamentals Blog

6 Things to Consider Before Financing Your New Car

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When it’s time to buy a new vehicle, auto loans are a popular, low-cost financing option that increases your spending power without gouging your bank account with high interest rates.


Despite the convenience and affordability of auto financing, consumers should still approach financing carefully and make sure that their auto loan decisions don’t set them up for financial trouble later on. Here are six things to consider before you sign on the dotted line.


1. Can you afford the proposed monthly payment?

It’s an obvious question, but it’s an important one. If you aren’t able to keep up with monthly payments, you could end up having your vehicle repossessed. Don’t paint yourself into this financial corner. If the payments are too high, consider paying more upfront or settling for a less expensive vehicle.


Use our car loan calculator to see the monthly payment you can expect based on other variables, including your down payment amount and your loan interest rate.


2. Have you gathered multiple quotes?

Like mortgages and other types of personal loans, auto loan interest rates can vary from one servicer to the next. 


Start with your local credit union, where you’re likely to receive a competitive quote that other lenders will be pressured to match. Gather multiple quotes and bring them to the dealership to see if these lenders are willing to compete with one another.


3. Will the equity in the vehicle exceed your auto loan amount?

When you buy a new car, the value of that vehicle can drop by about 10% in the first month after you drive it off of the lot. If you buy a $30,000 vehicle and finance it all, this could mean you end up with $30,000 in debt for a vehicle that’s worth just $27,000.


This is called being “underwater” with your loan, and it’s a scenario you should avoid. If you’re buying new, put down a hefty down payment. If you have to sell sooner than you’d like, you can rest assured the sale price will be enough to pay off what you owe.


4. How long do you plan to keep your vehicle?

Do you like to change cars every three years? Or maybe you try to push it to 10 years per vehicle. Either way, have a plan when buying your vehicle, and choose a loan repayment term that falls within that range. You want to avoid a situation where you try to sell a car after three years and still owe three years of payments on that vehicle.


5. Does the dealership offer any financing promotions?

From interest-free financing to 90-day deferred payments, dealerships may offer compelling financing offers that may beat what other lenders can offer. Ask about these ahead of time to make sure you’re getting not just the best interest rate, but the best terms as well.


You should also review the terms and benefits of loans offered by your credit union and other competitors. In addition to the competitive rates credit unions offer, there may be additional terms or advantages that other lenders may not offer.


6. Do you know everything included in your auto loan?

In many cases, the auto loan may be financing not only the base price of the vehicle but also the taxes owed on the vehicle as well as BMV registration fees. Some consumers may prefer to finance these additional costs, while others may want to cover them out of pocket. 


Regardless of which option you choose, make sure you understand all of the costs packaged within your loan as well as what additional costs you may be expected to cover on their own.


Don’t fall into common consumer traps.

While auto financing can be a great tool to afford a new vehicle purchase while keeping your finances stable, this financial product can set you up for trouble if not used responsibly.


Start the path to a new car purchase; apply for an auto loan today.


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