Should You Get an Auto Loan?

[Apr 2, 2010.]

 

Drivers with good credit are getting some great deals on auto loans. "If you have a job, and there's equity in the loan…that's it," Ed Gorham, director of the finance department at Planet Honda, one of the biggest Honda dealers on the East Coast, told the Wall Street Journal. You may not need a down payment to get a loan and even people with credit scores as low as 400 are getting approved for financing.

Loan Rates Drop

Between January 2009 and March 2010 the average rate on an auto loan fell to 5.8% from 7.1% for people with credit scores between 720 and 850, according to data from Informa Research Services Inc. and J.D. Power and Associates. People with credit scores between 660 and 689 saw average rates fall to 9.4% from 10.2%.

Personal Loan vs. Dealer Financing

Even with auto loan rates down, should you finance a car? New cars start depreciating as soon as you drive them off the lot. So even if you buy a new car for $20,000, it could lose 15% of its value when you take it home, making it worth only $17,000--and you would still be paying interest on the total purchase price.

Not happy with the loan being offered at the auto dealer? Consider borrowing a personal loan through your credit union or bank instead. Having financing in place can give you more confidence when going into a dealer to negotiate the purchase price of a vehicle.

New vs. Used Cars

There are two dominant camps when it comes to buying a car: Those who live for that new-car smell and those who think it's a waste of money to buy new vehicles. For many people, buying used makes sense, especially if you can afford to pay cash instead of getting a loan. But buying a new car has advantages, too, including the fact that you won't have a lot of repair costs for several years.

If you finance a car, the monthly loan payments won't be your only expense. You pay higher insurance and DMV fees for new cars than used. When deciding whether to finance a new or used car, be sure to get accurate quotes for the insurance premiums and other expenses so you can consider the true cost of ownership.

Avoiding Loan Double-Talk

Do not buy a car without really understanding how an auto loan is structured. Many auto dealers focus on the monthly payments without explaining how the interest and fees are broken down. It's important to ask how your down payment and any trade-in affect the actual price of the vehicle you purchase. Try to avoid discussing a trade-in until after you've actually negotiated the price of the auto.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.