Choosing an Auto Loan
November 11, 2007 - 6:15 PM EST
Gone are the days when car dealers preferred a cash customer. Today, a vendor prefers to sell a car on credit. The reason for this change is that the dealer is actually selling two things; a car and a credit loan. Ultimately, this results in two areas of commission for the dealer. Likewise, you as the customer are buying those two things. Many customers make the mistake of carefully choosing their car, but do not spend as much time evaluating their loan.
Assume the worst when choosing your loan. What happens if a car you have just bought on credit is stolen? What happens if your car is totaled in an accident, even if it isn't your fault? If nothing is stipulated in the loan contract, the customer usually ends up continuing to repay the loan until money from the insurance company is obtained. Even then, the customer usually has to reimburse the lender the difference between loan balance and the insurance settlement. Some lenders may possibly even enforce a penalty for premature payoff.
While you are almost always required to have full coverage insurance, verify that your policy covers the vehicle in the event of theft. Also consider GAP coverage or GAP insurance. This is a type of insurance that covers the difference between the book value amount remaining on your car loan and assessed value of the vehicle at the time of the accident or theft. Also, make sure that the loan contract gives you the ability to make payments early and that those payments are applied to the loan principle. In addition, ensure there is no penalty if you pay off the loan early.
It might be better to get a new car loan, rather than a used vehicle loan. This is usually because a lender knows exactly how to value his money in association with a new car (there are tools to calculate the depreciation of all new cars), a banker always give better options to a new car buyer. Conversely, a higher rate is usually assigned to a second-hand car, which already has a questionable starting value (which affects the amount financed), and whose value going forward is subject to further questions.
Some dealers also have their own funding agencies, but beware their services are highly variable in quality. Rates and terms offered may vary depending on the model, and depending on the time of year. On a model that does not sell, an auto manufacturer may arrange to offer attractive incentives. This is not the case for a model for which there is a waiting list, or high demand. Also, pay attention to the time of year. Conditions are less advantageous in late spring, when many people buy new cars as they look toward the summer. The best buying conditions are at the end of the year. Most dealers want to finish out the year with good numbers and are usually feeling competition from the holidays.
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