Auto dealers and finance companies are beginning to loosen up the restrictions on consumer credit that helped to clamp down auto sales starting in 2008. That means it is getting easier for people with so-so credit to get auto loans.
But just because the dealer or local bank will write you a loan, don't just be bowled over by the surprise. Go in to the dealership prepared with information. After all, car salespeople and loan qualifiers do their job every day. You do it once every few years. They are better at it than you are.
Here are eight tips for you to consider before heading into the showroom:1. Don't negotiate a price based on what you can afford in a monthly payment. If the salesperson asks you what that figure is, just say, "I have an open mind." If you tell the salesperson what you can afford, he or she will magically arrive at that number or more without regard to the final price of the vehicle.
2. Know what you can afford. Make sure to account for monthly payments, including tax, title and registration fees that will be rolled into your total loan. Your monthly payment should not exceed 20% of your monthly after-tax income. If you are putting 20% down, see if you can also cover those fees with cash. No sense paying interest on fees, right?
3. Try not to take more than a four-year loan. Five, six and seven-year loans are possible, but unwise. Who wants to still be paying on a car after the warranty is over? Five years is the maximum you should carry a car loan. If you can't swing the car you want in a four-year loan, or even a five-year term, think about a cheaper car, or a certified used version of the car you want.
4. Shop for rates. The interest rate offered by the dealer will often not be the lowest rate you can get. Try at least three sources before committing. And check your employer to see if you can borrow the money from your 401k, and then repay it monthly just like a loan, paying yourself the interest instead of a bank. This is a gamble, too, because if you borrow $20,000 from your 401k, and you pay the money back at 5%, that rate may be less than what it would earn in the financial markets.
5. Before you trade your old car in, spend at least two weeks having it listed on one of the online selling sites. This usually brings you much more than a trade-in. And it's simpler than you think.
6. If you can handle a 20% downpayment, do it. Your rate should be better the more you can put down.
7. If you aren't sure, or comfortable, say, 'Thank you for your time. I will think about it," and leave. Don't hesitate. And don't let the salesperson keep you if you want space. Keep walking after you excuse yourself. When you show doubt or hesitation, a salesperson smells blood. Be strong and walk. Come back when you are sure.
8. Remember that a vehicle purchase is business, not personal. If you aren't comfortable with your salesperson, ask to see the manager and request a new salesperson. There will be awkward moments, but who cares? This is your money and four or five years of making payments. You deserve to feel comfortable.
Take the first steps to building your portfolio.View Course »