I Want A Loan To Buy A Car

But many Americans make big mistakes buying cars. Take new car purchases with a trade-in. A third of buyers roll over an average of $5,000 in debt from their last car into their new loan. They're paying for a car they don't drive anymore. Ouch! That is not a winning personal finance strategy.

i want a loan to buy a car

"The single best advice I can give to people is to get preapproved for a car loan from your bank, a credit union or an online lender," says Philip Reed. He's an automotive expert who writes a column for the personal finance site NerdWallet. He also worked undercover at an auto dealership to learn the secrets of the business when he worked for the car-buying site Edmunds.com. So Reed is going to pull back the curtain on the car-buying game.

For one thing, he says, getting a loan from a lender outside the car dealership prompts buyers to think about a crucial question: "How much car can I afford? You want to do that before a salesperson has you falling in love with the limited model with the sunroof and leather seats."

Reed says getting preapproved also reveals any problems with your credit. So before you start car shopping, you might want to build up your credit score or get erroneous information off your credit report.

"The preapproval will act as a bargaining chip," he says. "If you're preapproved at 4.5%, the dealer says, 'Hey, you know, I can get you 3.5. Would you be interested?' And it's a good idea to take it, but make sure all of the terms and conditions, meaning the down payment and the length of the loan, remain the same."

Dianne Whitmire sells cars at a Toyota dealership near Los Angeles. She says she constantly sees people who spend hours and hours online researching a car, finding the best price, all the other information. They call her 10 times. But when they finally show up to drive the car, they say, "I didn't realize this seat was this way. This is not the model I want."

Whitmire says you need to be a bit more old school about things and actually drive a bunch of cars. "I've been doing this for 40 years," she says. "It used to be that people would go to a dealership and drive around and figure out what car they actually wanted, what their choices were."

She suggests driving cars that are within your budget so you aren't seduced by what you can't afford. This means you want to find salespeople who are OK showing you a bunch of cars and not being too pushy or trying to upsell you into a pricier model.

The salesperson at the dealership will often want to know if you're planning to trade in another car and whether you're also looking to get a loan through the dealership. Reed says don't answer those questions! That makes the game too complicated, and you're playing against pros.

If you negotiate a really good purchase price on the car, they might jack up the interest rate to make extra money or lowball you on your trade-in. They can juggle all those factors in their head at once. You don't want to. Keep it simple. One thing at a time.

A third of new car loans are now longer than six years. And that's "a really dangerous trend," says Reed. We have a whole story about why that's the case. In short, a seven-year loan will mean lower monthly payments than a five-year loan. But it will also mean paying a lot more money in interest.

As with other types of loans, you pay a lot more interest than principal in the early years, so you're paying off what you actually owe much more slowly in a seven-year loan. "There's so much interest front-loaded in that," says Whitmire.

Seven-year car loans are financially dangerous because cars depreciate in value the moment you drive off the lot. "You're waging this battle against depreciation because basically you're paying off a loan while the car drops in value," says Reed.

One big risk is that you might need to sell the car well before seven years. You might lose your job, or you have a kid, or a third kid and need a minivan. When you go to sell that car on a seven-year loan, you're likely going to find out that you owe thousands of dollars more than the car is actually worth.

A lot of people could apparently use this advice. According to industry data, 32% of new car buyers with a trade-in are rolling over about $5,000 in negative equity into their next loan when they buy a new car.

"Concerning the extended factory warranty, you can always buy it later," says Reed. "So if you're buying a new car, you can buy it in three years from now, just before it goes out of warranty." At that point, if you want the extended warranty, he says, you should call several dealerships and ask for the best price each can offer.

Gap insurance promises to cover any gap between the purchase price of replacing your almost-new car with a brand-new car if your regular insurance doesn't pay for full replacement if your car gets totaled. Van Alst says gap insurance is often overpriced and is fundamentally problematic. If you still want the product, it's best to obtain it through your regular insurance company, not the dealer.

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If you're purchasing a used car that was financed and the owner still owes car payments on it, things can be complicated. All loans on a car with a lien must be paid off before you can get the clear title transferred directly to you. Once this happens, the owner can complete the transfer of ownership.

To find out if a car you want has an outstanding lien on it, conduct a lien search on your state's department of motor vehicles website. This will require the car's vehicle identification number, which you can get from the seller. You can either pay off the loan balance yourself by writing a check directly to the lender or ask the seller to pay off the loan. Here are the details of each option for buying a used car that hasn't been paid off:

One option to consider is asking the seller to pay off the amount owed on the vehicle so that he can officially get the title and then transfer it to you. If he can't afford to pay it off, he might have to take a loan out, but if you want the car, you'll need the title. If the seller plans to use the money you're paying him for the car to pay it off, get documentation from his finance company or bank that the loan was paid in full.

Sometimes a seller can't pay off the lien on a car, so you might consider taking out a loan and letting the bank know it's to cover a lien on a car. Your financial institution will take care of the paperwork with the lien holder, which helps streamline the process. Keep in mind, however, that taking out an auto loan will generate another new lien on the vehicle from your bank or car finance company.

If you sell a car you still owe money on to a private party, you'll have to alert the buyer about the lien. When you come to an agreement with the buyer, you must pay off your lender immediately and then transfer ownership to the buyer. You might want to use an escrow service for this type of transaction as an extra precaution because it will assume responsibility for receiving the buyers' payments and will hold the title until the sale is complete.

If you're buying a car and getting a loan, you have the option to finance the purchase through a bank or the dealership. The right choice between the two depends on a few different factors, and neither option is inherently better than the other.

Bank financing involves going directly to a bank or credit union to get a car loan. In general, you'll get preapproved for a loan before you ever set foot in the dealership. The lender will give you a quote and a letter of commitment that you can take to the dealer, saving yourself some time when finalizing the contract. Having a specific approved loan amount on paper could also keep the car salesperson from trying to persuade you to include add-ons that you don't need.

Depending on the bank or credit union, you can apply for preapproval online or at a local branch. You may need to provide information about the vehicle, which could cause some delays if you're not yet sure what you want.

The rate offer from a bank or credit union will be the true interest rate and doesn't include any markup, which can happen when you work with a dealer. In general, though, the rate quote you get isn't a final offer. When you head to the dealership to purchase the car, the lender will run a hard credit check and review your full credit report before approving your application and determining your loan rates.

Another form of dealer financing occurs when the dealership provides in-house financing. These buy here, pay here dealerships specialize in working with people with bad or no credit. But the costs and down payment requirements on these loans are high, and there's also a higher chance of repossession.How to Choose the Best OptionIn any situation, it's best to choose the option that will save you the most money. Unfortunately, it's not always easy to know what that option is upfront.

If you have bad credit, it may be especially important to look for options through banks and credit unions. Even if the interest rate is higher than you might want, it can still be a better setup than what you'd get with a buy here, pay here dealership.

Regardless of which option you choose, it's important to know that applying for auto loans can affect your credit scores. Every time you apply for a loan, the lender runs a hard inquiry on your credit report, which can knock a few points off your score.

Finally, check your budget to make sure you can afford the monthly payment. The last thing you want is to drive off the lot in a car that will cause you more distress than joy. What Makes a Good Credit Score? Learn what it takes to achieve a good credit score. Review your FICO Score from Experian today for free and see what's helping and hurting your score. 041b061a72