What you need to know before Buying that Car

Purchasing a vehicle is probably the first major purchase a person will make in their lifetime. It can involve you spending hours researching the make and model of the vehicle that will best suit your needs, and take into consideration all the options you may or not be able to afford. After hours, days, weeks and even sometimes months of research, you have finally found the one.

Only after the stress of the finding the vehicle and negotiating the price, do you get to the reality of financing this dream. Hopefully your will drive away with the confidence you have not only gotten a great deal on your new ride, but that you are also making smart financial sense when it comes to what your paying monthly.

First you need decide what payment you can afford. This is going to dictate all the aspects of the loan. Realistically, we would all like a $100 a month payment on a $24,000 vehicle but that would make my loan maturity date around 20 years and the car is not going to last that long.

Another consideration is going to be the what interest rate you qualify for. Make sure you are educated on your personal financial position- people will take you much more seriously if you actually know what you can afford, what your credit score consists of and what your income is. Contacting your bank or credit union to get a pre-approval is a great idea prior to heading to the dealership. Sometimes the dealership can get a better rate but is better to armed with a letter that says you have already been approved to make things go more smoothly.

Loan terms are calculated using the number of months i.e. 12 months is one year, 24 months is two years, 36 months is three years, 48 months is four years, 60 months is five years and 72 months is six years. A 72 month loan is the longest, and 60 months is more common for an auto loan.  There are some circumstances that allow you to get the monthly obligation at your comfort level. For example, the lender can adjust the repayment over odd months, for instance a 42 month loan which would be 3.5 years.

The term of the loan also affects the interest rate you receive. The longer the term, the more risky the loan. A newer trend in purchasing a vehicle is no money down. This can have an impact on the value of the vehicle along with the term if you finance the purchase price, taxes and titling fees.

Other options that provide additional expense to an auto loan are GAPP insurance and insurance protection. Every policy is written differently, but as a general overview, GAPP insurance protects you in the vehicle is a total loss and you owe more than the vehicle appraises for. In such case, GAPP insurance will pay the difference. This type of insurance is helpful if you have a long loan term i.e. 72 months and you finance all taxes and titling fees with no money down.

The cost of GAAP insurance can range from $250 to $1,200. Insurance protection is also called life and disability insurance. This insurance promises to pay the monthly loan payment if the primary borrower is disabled and unable to work for a period of time, or if the borrower is deceased and the insurance will pay the loan off. Some loan products will also cover a joint borrower as well. These options can be discussed with the lender and how they may affect the payment or term of the loan.  

After you have secured initial financing for the vehicle, then you always have the option to refinance the loan at another lending institution if you find a better rate and term at any point during your loan period. Doing this allows you to possibly do three things: lower your interest rate (if rates have been fallen or your credit score has improved), extend or shorter your term or lower your payment.  

As you can see there are multiple facets to borrowing money for an auto loan: price, term, interest rate and payment. Discussing all your options, and knowing your comfort level will provide a road to financial success when deciding what loan product best fits your needs.