Kicking the Tires on an Auto Loan

Buying a new vehicle is stressful enough without having to make a decision about how to pay for it. Zero-percent financing, rebate offers of thousands of dollars, small down payments, bank financing, dealer financing – so many choices are enough to make your head spin even before you've taken your dream purchase out for a spin. FDIC Consumer News offers these tips to help you save time and money when it comes to shopping for an auto loan.


1. Review your credit report long before you intend to apply for a loan. A credit report is a summary of your financial reliability – for the most part, your history of paying debts and other bills – as compiled by a company called a credit bureau. Why should you see your credit report before applying for a car loan? To correct any error before it slows down your credit approval or prevents you from getting the best possible loan terms.


2. Shop for a loan before you visit a dealership or bid for a car over the Internet. Ask about the loans they offer – the number of months for which you can borrow, the interest rates being offered, whether there are penalties if you pay the loan off early, and so on. Ask about other options for financing the car.






3. Be careful figuring out how much to borrow and for how long. Of course, the dollar amount of your loan largely will be determined by the sale price of the vehicle minus your down payment, any rebates and the value of any trade-in. But there are other costs that you should consider when deciding how much of a car you can afford and how much of a loan you need. Those costs include auto insurance, sales taxes, annual property taxes on the car (if any), and options you may be inclined to buy, such as an extended warranty. Also remember that every item you add to your loan instead of paying up-front will add to the total cost of the loan because you will be paying interest on the amount financed.


After you determine how big a loan you need, try to pick a repayment period that makes sense for you. For example, a $15,000 loan at 4 percent interest for 36 months equals a monthly payment of $443. Stretch the same loan out to 48 months and the monthly payment drops to $339. While it's tempting to go with a longer loan to reduce your payment, be careful.


Creamean says to be especially cautious before taking an auto loan term of five years or more. "First," she says, "if you have little cash for a down payment and you have to take on a loan of five or seven years, you might be trying to buy more car than you can really afford. Also, in the later years of the loan, you'll still be making payments on what is an older vehicle that may have a lot of repair and maintenance costs."


4. Know what you are signing and speak up if you think there's a problem. A variety of laws provide consumer protections in the context of auto loans. Among them: the federal Truth in Lending Act, which requires lenders to disclose to borrowers the terms of a loan (including the Annual Percentage Rate and the total cost of the loan), and federal and state laws that prohibit unfair or deceptive business practices. However, you have a responsibility for protecting yourself, too.

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