Securing auto loans through a dealership may not be the most cost-efficient option. Oftentimes, dealers raise interest rates on loans as much as 2 or 3 percentage points, gauging consumers. All is not lost, however. There is a myriad of ways for the consumer to gauge right back. The first is to be prepared.
Fairly acquainted with the stereotype of an automotive dealer, you fought tooth and nail for your new car’s options. “Re-enforced anti-oxidant carburettor gloss; no, I don’t need that,” you said. And after hours of haggling and grappling, push finally came to shove and you drove back the price on, what is now your fine automobile. A sense of accomplishment overwhelmed you; you won — new wheels at a fair deal. But what about auto loans? Are dealerships taking advantage of consumers when it comes time to finance cars? You bet your sweet Lexus they are.
The days when families would cut open the mattress and plop down five hundred dollars for a new car are a fading memory. The high cost of vehicles has wedged consumers into opting for auto loans to finance their desire for a new set of wheels — and these loans are tricky. Ubiquitous advertisements herald car loans at, “all-time low APRs!” But what, exactly, does this mean?
APR, or Annual Percentage Rate, is the index by which interest for loans on your car is calculated. Here is an example: A $25,000/24-month loan at an APR of 3.85 would yield a monthly payment of 1,083.95. All tolled, a consumer would pay 26,014.91; or 1,014.91 in total interest payments. The lowest APRs occur during the shortest loans. Lenders might raise the APR to, say, 4.49 for a 48-month loan on $25,000. Monthly payments for a car loan under these circumstances would be $569.97. All tolled, interest expenses would be $2,358.78. This is an important decision to consider: How quickly can you pay off your loan?
The length of terms for auto loans has been increasing steadily over the years; some soaring to 72 months. That might not seem like a tremendous amount of time, but when you factor in depreciation for the value of your car, you might realize — as many dealerships are realizing — that the worth of your car is less than the amount owed on your loan. After three years and countless miles, your $25,000 vehicle might Blue Book at a third of what you paid; yet, you still have 36 months of payments — half the loan. This precarious predicament has the undivided attention of the suppliers of car loans. A consumer could renege; break the lease and allow the car to be repossessed.
To combat this possible impulse, dealerships offer incentives to purchase newer cars. Rebates are issued for portions of old car loans and consumers are encouraged to finance new cars. The dealership adds surviving loan payments to the new loan term, and while monthly payments remain static, a 60-month loan becomes a 72-month loan. Consumers are roped into longer loans, doling out more and more in interest payments.
The important thing to remember about car loans is to shop around. You sought out the best deal for your car; do the same with loans. Banks are increasingly offering assistance for both new and used cars; a new website (eloan.com) tenders to loan for person-to-person used vehicle purchases. The Internet is a valuable tool; use it to find the auto loans that meet your budget and time schedule. If you are the type of person that enjoys a new car every three years or so, make sure you get a loan that allows you that freedom. If you get trapped into a 60 or 72-month loan, you may find yourself in the rollover predicament detailed previously.
If haggling was good enough for your air-conditioning or rims, it’s good enough for your auto loan. The first quote from a dealer or bank is just that; it’s not final. Make sure to review your credit history for any mistakes, and to have some idea as to your loan viability. And finally, don’t be fooled by low initial APRs. When given a quote, ask the loan provider to calculate the total interest you’ll end up paying. Get competing bids, and most importantly, don’t be afraid to gauge right back. They respect that.