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Top Five Tips for Choosing Your Best Auto Loan

[Nov 23, 2009.]

 

1. Check Your Credit Report First

Cheap loans may be everywhere at the moment, but many people don't qualify for them. Before you apply for any sort of credit (except for no credit check loans) be sure to check your FICO credit score.

Don't assume that it's the same now as it was a few months ago, just because you've done nothing wrong in the interim. All too many Americans today have lower credit scores through no fault of their own.

Just applying for a loan can harm your credit score, so don't wait until you've been rejected to check yours. You could make things even worse.

2. Auto Loans' Rates Vary--Compare Them

Auto loans are a very competitive business, and you can make serious savings by shopping around for the best rates. Be sure to compare like with like. That means that you shouldn't compare a straight rate with an annual percentage rate (APR), because they're not the same. The best method is to compare only APRs.

Take out a $15,000 auto loan for five years and rate variations can make a big difference:

  • A 6.5% interest rate means you pay total interest of $2,609.53
  • A 7.5% interest rate means you pay total interest of $3,034.15
  • An 8.75% interest rate means you pay total interest of $3,573.51

Compare auto loans now.

3. Choose the Shortest Term You Can Afford

The longer your loan, the more you pay in interest. Suppose you're paying 10 percent interest on a $15,000 auto loan. Then:

  • Interest on a five-year loan is $4,122
  • Interest on a four-year loan is $3,261
  • Interest on a three-year loan is $2,424

So you save $1,698 by taking out a three-year loan instead of one lasting five years. But, of course, your monthly payments are higher.

4. Check Out the Whole Loan Package

Rates and loan length are at the heart of a good deal. But there's more. Make sure you know the answers to these six questions before you sign anything:

  1. What fees have to be paid?
  2. What are the penalties if you are late paying, or get behind with your installments?
  3. How much does it cost to pay off the loan early?
  4. Are there any nasty surprises in the small print?
  5. How much total interest do you pay over the life of the loan?
  6. Is the lender reputable, and--if appropriate--trained, accredited, and/or certified?

Shop around for the best overall deal; not just the best headline rate.

5. Ask Questions

Don't be worried that you might look stupid if you ask questions of your prospective lender's employees. You won't. They may think you are way smarter than most of the applicants they deal with.

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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