The Basic Steps of Automotive Financing

Some people can walk into Alderman Automotive, find the car they like, write a check for the full amount, and drive out with their purchase. But there aren’t many of them, especially considering the average cost of today’s new vehicles. The rest of us must figure out how to pay for our rides over time. Most of us purchase through financing, and as in all things, some ways of going about it are better than others.  

Financing a car involves determining two amounts of money: How much cash to put down, and what you agree to pay monthly. The general rule for a down payment, as determined by lenders, is a minimum of 10% to 20% of the purchase price. If you have a vehicle to trade in, that can be part of the down payment.  

The Importance of Interest 

The cost of borrowing the rest of the money is the interest. Your goal when financing is to land the lowest interest rate possible. Several factors affect the interest rate. First, the overall cost of money in the country is determined by the Federal Reserve. While it doesn’t set the interest rate for your loan, it determines the cost of money for those who will lend it to you. There is not much you can do about that outside of trying to time your purchase with low rates.  

The next factor is your credit score, which is primarily determined by your credit history. If you are a good risk, based primarily on your history of borrowing and paying back loans, you are likely to get a better rate than someone who has had trouble paying his or her loans, rent or other creditors in the past. Other factors include the amount of existing loans and the length of the loan. Finally, there are the lenders themselves. Different lenders will offer different rates even when the above is the same, so it pays to shop for your loan. 

Consider this example of how much difference interest rates can make. Let’s say you are interested in one of the more premium vehicles in our inventory, and after your down payment, you figure on borrowing $40,000 with a loan term of 69 months. With an interest rate of 5.95%, your monthly payment would be $772 and the total interest paid across the term of the loan would be $6,343. Just dropping one percentage point to 4.95% would change the monthly payment to $754, which may not seem like a big difference, but the interest paid would be $5,236, or $1,107 less than with the larger rate. That’s probably more than enough to cover the new set of tires you will likely need by then. 

Setting the Loan Period 

The other way to reduce the interest paid is to shorten the loan period. The interest is based in part on how long you “have” their money in the form of the car, so the shorter the period, the less the interest. In the example above, shortening the loan term to 48 months would reduce the interest paid to $4,173. However, since you are now dividing the loan by 48 instead of 60, the monthly payment rises to $920, so there is that trade-off.  

Pre-shop Your Loan 

If you belong to a credit union, that is a good place to start shopping, as they are known for low car loan interest rates. If you have a good history with a bank, talk to them or another finance institution that would be convenient to work with. Afterward, if you are interested in a vehicle at Alderman Automotive, talk to our Finance Center representatives. Since they deal with car loans all the time and also want to sell you the vehicle, they may be able to find you a better rate. If not, you have done your homework and know who to fall back on. 

Yes, it would be nice to cover a car purchase with the cash you have on hand, but with attention to becoming a good risk and enough due diligence in looking at finance options, you can get the best possible car financing arrangement, which will allow you to enjoy your car purchase that much more.