So, you’ve just bought a new car, and you’re excited. You’ve got the new car smell, zero on the odometer, and they even threw in the floor mats for free! If you planned appropriately and did the math before entering the dealership, you’re in great shape. Many of us were not so lucky, and may have gone a little overboard when deciding exactly how much car we could afford.
Luckily, this is a common issue for Americans, so there’s tons of advice on how to avoid financing an unaffordable vehicle. We’ve come up with three helpful hints on how to structure your deal for more affordable monthly payments, so you can drive away with confidence.
Don’t Finance Through a Dealership
You’ll want to compare offers from multiple lenders before deciding on which one to partner with, but it’s generally advisable to never walk into a dealership without your financing already figured out. Typical auto loan rates range from 4-8% depending on the institution you are financing through and your current credit score. Don’t be afraid to shop around; you would be surprised at the variance in interest rates offered to someone with the same credit score and history.
Auto dealerships frequently advertise special financing options, either through themselves or the manufacturer, that seem better on the surface than a traditional loan through a financial institution. However, these are often misleading, and the devil is in the details when it comes to big financial decisions like an auto loan.
Your financial institution can provide guidance on auto loan rates, what your price range for a car should be, and how to budget appropriately once you’ve driven off the lot. Visit Equity Bank’s auto loans page to find out more about our rates.
Big Down Payments
The best way to reduce your monthly payments is to eliminate most of the cost up front. Generally, you’ll want to pay off around 15-20% of the total price of the vehicle with a down payment, though more is always better. As a general rule, for every extra $1,000 in down payment, you can expect to see a $15-20 reduction in your monthly payment (depending on the expected lifetime of your loan).
Putting down more money up front also means that you will owe less on the back end, and thus end up paying less in interest over the life of the loan. Typically, auto loans will be structured with rising interest rates based on the life of the loan, with 36-72 months being the standard range offered from dealerships. If you’re putting down 20% of the cost up front, and plan to pay off the loan in 4 years, your interest rate should be hovering around the 4-5% mark, which is just about ideal. Remember, just like the price of the vehicle, the interest rate on your financing plan is negotiable — never take the first offer!
Buy a Less Expensive Vehicle
This may not seem like a financing tip, but it truly is. In many cases, our eyes are bigger than our wallets. Tons of people drive off the lot every day in cars that they can get financed for, but can’t truly afford.
This doesn’t mean you have to drive a clunker your whole life, or that you have to forgo a new vehicle for a used one, but keep in mind that financing an automobile is a massive financial move. Letting your heart make the decision rather than your brain is a recipe for disaster, and can set you back years in your long-term financial strategy. Try to find used vehicles that suit your needs, or ask about the differences in types of a specific model of vehicle you like. A car salesperson will always point you to the midrange model to try and gauge your appetite and price range, so be sure to ask what the differences are between levels. You may be surprised at how little changes between each level, and how much you can save while still getting a vehicle you love.
You can use Equity Bank’s online budgeting tools to help you plan for your next big purchase.
Drive Away Happy
Driving off the lot knowing you got a great deal is one of the best feelings in life. If you plan carefully, and team up with the right financial partner, you can negotiate and drive away with confidence. Visit your local Equity Bank branch or contact us today to see how we can help you get the wheels turning.