A Guide to Your Auto Loan: 4 Things to Know Before You Go


December 03, 2016

Most car buyers think the negotiation is over when they settle on a final price. But paying for a new or used car is actually the more complicated process, and not preparing yourself can result in hidden costs or financial hardships. Avoid the common pitfalls by educating yourself and learning as much as you can before signing on the dotted line.

An Auto Loan is a great way to build your credit rating.

If you have a limited or challenged credit history, starting with a small auto loan is a great way to build your rating. Even if you just finance $5,000 of a $15,000 purchase, making regular payments on an installment loan will quickly increase your credit score. Further, if you don’t immediately qualify for a low APR (annual percentage rate), you always have the option to refinance to get a more favorable interest rate down the line.

Credit Unions provide great advantages over dealer financing.

Credit unions offer a great alternative to dealer financing and allow you to apply for your loan in advance. Taking care of your financing independently of choosing your car lets you focus on getting the car you really want. Credit Unions are easy to join and since they are not-for-profit organizations, they often offer lower rates and more flexible terms than dealerships. At Carlypso, we work with a credit union network that helps find you the best rates among many different partners. For example, Golden1 is one of the largest credit unions in California, and the only requirement to join is to live and work within the state.

Get all the terms of your loan.

One of the easiest ways for consumers to get themselves in hot water is to focus too much on the monthly payment. A finance manager can manipulate all sorts of loan terms, including down payment, APR and term, to get the monthly payment just about anywhere. These days, it is not uncommon to see loan terms of 84 months, and while that might provide a low monthly payment, it may also sway someone to buy much more car than they need. For example, if you had a budget of $400 per month, you could purchase a $20,000 car financed over 54 months, or a $30,000 car financed over 84 months (3% APR, no money down).  That is an extra three-and-a-half years tacked onto your loan – a big difference! The best way to avoid any surprises is to request all the critical terms when it comes to your loan: Interest rate, or annual percentage rate (APR), term (length), down payment, amount to be financed, and total cost of the loan.

Additional protection plans can save you down the road.

Once you have chosen your car and finalized your financing, your dealer will likely start pitching additional protection plans. First, you are under no obligation to purchase anything additional from the dealer so do not get pressured into buying anything you do not completely understand. However, with that said there are several programs that can save you from headache down the road that are worth your consideration. GAP insurance pays off the difference between what you owe on the loan and what the car is worth in the event of a total loss accident. Its typically an inexpensive insurance policy that could save you thousands if you ever need it. Another beneficial protection plan is an extended warranty. Carlypso sells the highest quality pre-owned vehicles, but factory warranty’s are often short and covering even routine repairs that are inevitable in several years will get expensive. This is especially beneficial for European vehicles that have very high parts costs and lack the same quality track record of American or Japanese cars. These extended warranty plans do cost a bit more, but compared to replacing your own fuel pump or transmission repair at 100,000+ miles, they are a strong value. Key here is not to get pressured into buying. You can always add these plans to your existing vehicle so take the time to do your own research and make the best decision for you.

Buying a new or pre-owned car is a big decision, but also a fun one. There is nothing better than driving your shiny new ride for the first time and feeling good about your purchase. The best way to keep feeling good is to educate yourself to ensure you made the best decision possible.