Buying a Car? Tips for Arranging Auto Financing
Friday, September 30, 2016
Making car-buying decisions based solely on a low monthly payment could be financially hazardous and is becoming a problematic trend amongst many consumers. When buying a car it’s important consumers are aware of the potential consequences of financing vehicles over extended terms (e.g. 84-96 months). In some instances, particularly if the consumer has bruised credit and therefore only qualifies for a high interest loan, stretching the repayment term out can result in paying more in interest than the actual purchase price of the vehicle. Consumers should ensure they are getting the finance terms they want and can afford.
The Dangers of Low Monthly Payments and Extended Terms
Although it may seem beneficial to have lower monthly payments, consumers should educate themselves and carefully review lease or finance agreements.
A longer term loan may mean smaller monthly payments but consumers should consider the overall cost of the loan and interest accumulated. If consumers don’t get the best deal available on the interest rate, they could end up making significant interest payments over the span of the loan.
As well, consumers who finance vehicles over extended terms often find themselves “up-side-down.” This term, often referred to as having “negative equity,” means the consumer owes more for the car than it is actually worth. When one considers how quickly vehicles depreciate (especially with the high mileage many commuters put on their vehicles) and how frequently consumers trade-in, financing a car over 84-96 months often means consumers need to borrow much greater sums of money when they trade-in a vehicle that still has years owing on it. These consumers find themselves borrowing for their new car and borrowing even more money to pay off the negative equity on their trade. This is guaranteed to lead to even higher monthly payments in the future; and when one considers the snowball effect of negative equity and the risk of higher interest rates looming, the trend of 84-96 month vehicle loans could be disastrous for many family budgets.
Tips for Arranging Auto Financing
Consider the term and interest rate.
How long do you keep vehicles?
Do you usually trade them in before paying them off?
Do you have cash for a down payment or are you financing the entire purchase amount?
What would happen if the vehicle was stolen or destroyed and there was negative equity involved?
Remember: Insurance companies will pay what the vehicle was worth, not what was owed on the purchase loan.
- Determine the overall cost of a loan:
Longer terms may mean lower monthly payments but they also usually mean higher overall costs of borrowing.
Dealers can often arrange exceptional financing for their customers. It should be noted however that most dealers have access to a number of different lenders. Typically, lenders pay a fee to the dealer for arranging the financing. Consumers should ensure they are getting the finance terms they want and can afford. Note: at most dealerships vehicle prices are negotiable; sometimes, so are the finance terms (i.e. interest rate).
Just as consumers educate themselves about the vehicles they intend to buy, they should also inform themselves of the products/services available to pay for those vehicles. Before visiting the dealership, consumers are well-advised to contact their bank/financial institution and inquire about the terms and interest rates they can offer (they do vary between lenders). This allows consumers to comparison shop with the financing available at the dealership.
The term and rates available to any consumer will be based, in part, on the vehicle purchased and the buyer’s employment history and creditworthiness (credit score). Before applying for any large loan, consumers may want to inquire about their credit score by contacting a credit bureau agency.
Two of the most commonly used agencies are:
Remember: Be an informed consumer. Understand the possible risks associated with long-term auto financing and carefully review any vehicle purchase agreement and finance agreement before signing.
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Ontario Motor Vehicle Industry Council
Ontario Motor Vehicle Industry Council
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