Someone I know is in the market for her first car loan. I was flattered that she asked me about how car loans work. She is pretty smart. If she had questions, I am sure many of you might have the same questions. This post will discuss what you should think about if you are a twenty-something (or a “real live adult”) looking for a car loan.
Start by finding a car. This should not be an obnoxious large truck or SUV. It should be a nice small car with good gas mileage. I live in Colorado and did fine with a station wagon (hand me down) and have had no problems with my Corolla. Obnoxious SUVs and trucks are bad for the environment, often stick out of parking spots, and make me want to vandalize. (End of commentary) In all honesty, a broker is probably your best bet to save big on a new or used car.
Once you find your car, the dealership will likely suggest a bank or credit union, or their finance subsidiary, for a loan. Before you say yes, shop around. I found the best interest rate in my part of the country at a local credit union. I found a way to join and apply for the loan. There was a catch. I needed at 720 credit score (mine was 717 at the time) to get the best rate. I was not paying 1% more because I am young, so I asked my Dad to co-sign with me.
When you shop around for a car loan, do not give each bank your detailed information. Each time you fill out an application, even if you don't take the loan, you will get a hard hit on your credit report. One or two is not a big deal, but 5 or 7 can lower your score. When you fill out the first application, ask for your credit score. The bank cannot give you a copy of the report, but they can let you look at the report and score. This will be helpful when you shop around. Ask other banks what their best rate is and what credit score you need for the rate. Also find out what fees there are to get the loan. Some are imposed by the local government, some are banking fees. The taxes will be the same no matter where you get the loan, as they are based on where you live. The fees vary.
Do ask the dealership what their best rate is. Do check bankrate.com. Do go to local bank and credit union websites. Credit unions are generally better for car loans than commercial banks. My car loan is at 5.95%. Rates dipped down to 4.95% in Colorado for a while, but the cost to refinance outweighed the savings. You should be able to find a loan in the 6%-7% range most places in the United States.
Once you settle on a loan, your credit union or bank will work out the details with the dealership or broker. You might have to deliver papers between the two. At this point, you will have to pay your down payment to the dealer. The bank will pay the dealer for the rest of the car and will keep the title until your loan is paid off. A larger down payment means lower monthly payments and lower total interest costs over the life of the loan.
Some things to remember:
- Higher down payments mean lower loan payments
- High origination fees might outweigh a slightly better interest rate
- Co-sign with your parents (if you can) if it will get you a lower interest rate
- Installment loans, including car loans, are the fastest way to improve your credit score
- Late payments will damage your credit score
- Do not buy a car you can't afford
I think that is all inclusive. Feel free to include anything I forgot in the comments. I am sure my friend will read them. I will also answer any questions you leave in the comments. Happy car shopping.
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