In an ideal world we all want to be debt-free; and borrowing money is something that we all should approach with caution. However, when it comes to living a real life, very few of us will be able to escape borrowing money to finance a larger purchase. A car can be one of those big purchases and, unless you’re happy to ride a bicycle or save up money in your sock, you may need to find an alternative way to finance it.
Getting a car loan can seem a straightforward process but there are a few things you should consider. It’s very easy to fall in a trap and take a larger commitment than you can actually afford.
The majority of car loan calculators found on the web are very optimistic. They will ask you to enter your monthly or yearly income to estimate how much you can afford to borrow.
It all seems cut and dried, but there is a catch. For example, let’s assume your yearly income is $40,000 and your spouse’s is $25,000. Depending on the website you use, certain calculators will estimate that you can afford a monthly repayment of $830 (which comes to approximately $10,000 per year). However, many experts recommend that you keep your auto loan spending under 10% of your household income. So, if your total household income is $65,000 per year, it is more sensible to spend less than $6,500 on finance; that’s $540 in monthly repayments.
By staying under that 10% threshold, you’ll find living more comfortable and less stressful. Once armed with this simple information, you can then proceed with looking for a deal that offers you the best APR and repayment rates.
There are a number of different sources that you can look to in order to finance a car, such as banks, car dealership loans, car finance brokers, and online loan providers. Each of these have their pros and cons, and you should consider which one is the best for you before you ask any questions about getting the loan.
Here is a brief summary of the four most common car loan alternatives:
1. Getting a Car Loan from the Bank
Getting a car loan from your bank is probably one of the most common ways in which car purchases are financed. Banks traditionally offer personal loans so that cars can be purchased, and these have a fairly reasonable APR. The procedure is not very complicated. Bank loans are usually secured, which means you will have to use your home or the car as a security. Recently, banks have become more reluctant to lend to people, and you will need to have a very good credit rating in order to obtain reasonable car loan from this source. In fact, you may find that you struggle to get a loan from the bank under any conditions. This is where other sources of finance should be looked at.
2. Getting a Car Loan from the Car Dealership
Another common source of car loans is through the car dealership itself. Dealers are often associated with a particular loan company, and they can help to negotiate a better rate, although that is not guaranteed as some dealers are quite greedy. This can help you get a car loan which is especially focused upon your car’s needs, including getting cheaper insurance and warranty. However, these types of car loans often have a very high annual percentage rate (APR).
3. Getting a Car Financed through a Broker
You do not actually get your financing from a broker, instead the broker compares offers from different companies and offers a contract with a loan company through the car loan broker. Using a middleman may sound intimidating, however, in many cases a deal like this can be rewarding, as brokers can sometimes help you to get a better deal on your car loan than either banks or dealerships. On the downside, you will have to pay the broker a fee in order to find you a loan, and this can be costly.
4. Getting Car Loans Online
Online lenders can seem like the most attractive offer. They can often supply you with low-cost car loan, which you can then use to purchase the car and obtain the necessary insurance. There are so many of these companies operating through the internet that it is likely you will find some company to take you on, no matter how bad your credit, or how much you need. On the downside, some online lenders are not legal, and they may be trying to con you. These companies may also go bust, and then your debt will be sold on to collectors. To avoid scams, it is essential that you research the company’s background, check online reviews, and make sure the online lender is registered with a relevant Registry that governs lending companies.
If you commit to a car loan, you’ll need to be prepared to make regular repayments for three to five years. This is not something you’ll want to do on a whim — proper planning and budgeting is essential if you want to ensure you enjoy your car.
Photo Credit: jonrawlinson