1. Don’t wear one!
At least until you’ve done your homework. Many people go straight to an auto loan calculator because it provides instant answers on how much an auto loan might cost you.
The problem is that this figure can be quite misleading, because there are a number of factors that you need to check first before using any calculator to find out how much you will have to pay.
These are detailed below and while they will probably require a bit of research, they will most likely end up saving you a significant amount of money.
2. Vehicle price
Most new cars come with what’s known as an MSRP, which stands for a Manufacturer’s Suggested Retail Price, commonly known as a sticker price. This is the recommended price for the vehicle set by the manufacturer, also known as the list price.
This price is always negotiable, sometimes for quite large amounts. This means that you may end up paying significantly less in terms of actual price than you might think. What is important to note is that there are other factors that also affect the cost of the vehicle that need to be considered.
MSRP can also be significantly negotiated if you’re thinking of leasing a vehicle, something that many people don’t appreciate or realize.
3. Initial payment
The down payment is effectively the deposit you will agree to put on the vehicle. This obviously reduces the amount you need to borrow and the costs of repayment later.
People often think that the size of a down payment is determined by your credit score, in fact, you can decide any down payment size yourself. If you have significant savings, this may be a way to cut costs. Similarly, if you can take advantage of a zero or low interest rate, it may make more sense to have a smaller down payment and benefit from the savings through a lower interest rate.
4. Commercial value
This number of people will have an existing car that they want to sell or trade in for a newer one. If you trade one vehicle for another with a car dealer, you’ll likely get much less in terms of cash than if you sold it privately. Swapping a car for a new model is done primarily because it is easier. Keep in mind that you can also blur the line as to what kind of discount you’re getting on the new model.
5. Sales tax
Whether you purchase a vehicle lease, some type of sales tax will likely apply. It’s worth finding out the cost of this when deciding what type of vehicle to buy.
Some vehicles may have a lower tax if you choose a hybrid version, or an electric car, or a car with certain types of low emissions.
6. Interest rate
Most people are aware of what interest rates and how they work with regards to auto loans. What people may not realize is that you can negotiate an interest rate, the same way you can negotiate the price of a vehicle. When a finance company or credit broker makes an offer for financing, in many ways it is their opening offer.
They will want your business, especially if you have good credit. This means that, in many ways, they are likely to be able to be more flexible or negotiate than your original offer implies.
In either case, it’s worth trying to negotiate a lower interest rate, either through direct negotiation or by offering a higher down payment or a longer period of time for the loan to be valid.
7. Loan Term
The term of the loan is simply the number of months the loan is completed to work.
Many people opt for a longer loan term because it lowers their monthly payment costs.
Other people opt for a shorter loan term because even though it has higher monthly payment costs, there is a lower overall cost in terms of interest charges.
We balance it really depends on what is more important to the individual, having lower monthly payment costs or a cheaper overall loan.
8. Dealer Offers
Virtually every dealer from every manufacturer will bid on their vehicles. It’s standard sales practice and can have significant benefits for customers, but it can also be quite confusing at times.
Dealer bids can be made nationally, locally, or both. Offers may be related to certain vehicles, low or no interest rates, pre-approved customers, customer categories such as military and students, and may also apply at certain times of the year.
Getting rid of these offers can be tricky, especially if they’re based on the vehicle’s MSRP. However, it pays to understand the intent behind them and use that to your advantage when negotiating the price and terms and conditions of the loan.
Most car dealers have an Internet sales department. This can be a specific department or embedded as part of your overall sales team. In either case, they expect a large number of customers to trade effectively online, as well as over the phone before physically visiting the showroom.
That is a very simple reason for this.
Today, most customers can get a good idea of what they should be paying for a vehicle through research in areas such as price, trade values, credit ratings, etc.
What this actually means is that a client has a very strong trading position in a way that the Internet never has before. Being able to trade online and over the phone puts the customer in a much stronger position as they can help over the phone or click through to another website.
An automaker and dealer will recognize the power of this, and should be open to being much more flexible in all areas of price and terms and conditions and would be otherwise.
10. Credit score
Most people probably know what a credit score is.
They may not realize that they should be entitled to a free copy of their credit report at least once a year, which provides a breakdown of how their credit score was arrived at. They can also be all about getting a copy of what your credit score really is, although there is usually a charge for this.
Understanding how your credit score is made up through the information contained in your credit report is crucial before approaching any loan or finance company.
Anyone who offers you a loan will base it on a credit score determined by information in your credit report.
If that information is incorrect or out of date, it will have a detrimental effect on any loan offer made to you.
For that reason, it is crucial to check the information and make sure it is accurate. If it isn’t, the credit bureau has an obligation to fix it, and they’re usually pretty good at doing it.
11. Now use the calculator
Using an auto loan calculator can give you a realistic idea of what you should pay for an auto loan. You can really only do this when you enter information that is likely to be realistic.
This information relates to the price of the vehicle, the amount of the down payment, the repurchase value of the car, any sales tax that may apply, whether local or national, any discounts or offers from a dealer, and the duration or term of the car loan.