Auto Loan Primer
What to know before buying one of millions of cars sold annually
SAN MATEO, Calif., April 2, 2008 - Annually, Americans buy nearly 8 million new passenger cars, plus millions more new trucks and used vehicles. For those who are preparing to make an auto purchase, Brad Stroh, co-founder and co-CEO of the free online consumer finance portal Bills.com (www.bills.com), has some suggestions on finding the best financing.
"An automobile purchase should start with a budget, not a fantasy," cautioned Stroh. "Calculate monthly expenses, including gas costs, insurance (call your agent for estimates on models you're considering), maintenance and the car payment."
Stroh, whose company offers an auto loan portal at http://www.bills.com/auto-loans/, noted that most Americans finance 90 percent of their auto purchase. Here are Stroh's recommendations on how to find the best car loan:
1.Length: The basic car loan is short-term or long-term. Long-term loans are available primarily for new vehicles, whose loan terms can go up to 84 months. Used-car loans typically max out at about 48 months. A seven-year loan offers lower payments, but by the end of the loan term, the warranty is likely to have expired, and the car owner will be paying for maintenance in addition to the loan payments. Selling the vehicle before the loan is over risks being "upside down" in the loan -- owing more than the trade-in or resale is worth. Most buyers are better served by a less expensive vehicle with a shorter loan term.
2.No home equity: In today's market, a "home equity auto loan," a loan from equity to purchase a vehicle, is ill advised. While there may be some tax advantages, in the long term, the equity in a home is more precious than a car. Consult a tax or financial advisor before considering this type of loan.
3.Lender: Buyers can choose financing through an auto dealer, a bank or a credit union. Stroh suggests buyers contact different financial institutions to check loan rates and get pre-approval for a loan that fits their budget. When they make a purchase, the financing process will move faster. Usually, auto dealer financing is the most expensive option -- but also the easiest to get. These loans typically are not financed by the dealer, but by a large financial services company that has a relationship with the dealer.
4.Prime or subprime: Just as in the mortgage industry, "subprime" loans are available to those with "little or no credit" or with low credit scores. The tradeoff for the lender's higher risk is a higher interest rate (cost) to the buyer. If possible, buyers will benefit from working to improve their credit and obtain a better interest rate.
5.Don't charge it: Some advocate charging a car purchase to a credit card to accumulate "rewards" for airline miles or other benefits. "Unless you have cash in the bank to repay the charge immediately, don't risk financial security for a vehicle," Stroh said. "Many dealers do not allow this type of purchase."
6.Trade-ins: A trade-in counts, but often, auto dealers offer a low price on the trade, because the dealer must recondition the vehicle to make it saleable at a dealership. If a buyer still has a loan balance on an older vehicle, the dealer will assure it is no problem -- and roll the previous loan amount into the new financing. "Do the calculation first: The existing loan may be greater than what you receive for the trade-in," Stroh said. "Most car owners are better off selling the car themselves. Then you can apply any profit to the new car loan."
7.Loan terms: Ask for all the details: the interest rate, when payments start, how you will be billed (so you do not miss your first payment), the total amount of each payment, the total number of payments, and whether there are penalties for paying the loan off early. Ask if there are any hidden charges. Know the exact amount you are paying, and the amount that will be going to interest. Very important: Be sure the deal is not contingent on the approval of a third party for the financing. Sometimes, dealers invoke this provision - they will call in a day or two and say the first financer declined, but they have another lender at a higher rate. Have everything finalized before you drive off the lot.
"However you decide to pay for your wheels, the most important thing is to remain within your budget," Stroh said. "By carefully choosing your auto loan, you can do just that."
Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at http://www.bills.com/blog
Since 2002, Bills.com has served more than 40,000 customers nationwide while managing more than $1 billion in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.