This month marks an exciting time for me. I am paying off my car loanÂ two years early.Â In February 2010 I bought my 2004Â Ford Explorer, and took out a 4 year loan. The minimum monthly payment was $350. I paid as much as I could every month so that I could pay off the loan as early as possible. I cannot wait to start stashing that money away into savings. In this post, I’ll discuss car loans, and the best practices when using them.
Bank or Dealership
If you are purchasing a vehicle through a dealership, you will have to choose if you want to apply for the loan through the dealership, or directly through a bank. When you apply for an auto loan at a bank, you give them information on the vehicle, as well as personal information. The bank will pull your credit, check your income, verify the value of the vehicle you are purchasing, and either approve for the requested amount, counter-offer at a lower amount, or decline the loan. If you are approved,Â the bankÂ will require the bill of sale and the dealerships information. Most banks will take care of the rest, which includes receiving the title, placing the lien on the title, and sending the check to the dealership. Banks will often give interest rateÂ discountsÂ of up to half of a percentÂ to their current customers.
The other option is to have the dealership apply for the loan. In most cases, the dealership is simply taking the same application that banks take, and then sending your information to a variety of different banks. The dealership then reviews with you the different options that are available.
I will be honest. The best way to get the lowest interest rate is typically through the dealership. There are two reasons for this. First,Â Â dealerships send your application to multiple banks in order to find a bank that will accept, and better yet, to findÂ the lowestÂ available rate.Â Second, most banks have deals set up with car dealerships. These deals help the bank to achieve more loans, and help the dealership to sell more cars. It is a win-win for the bank and dealership, as well as the buyer, because it usually means a lower interest rate.
How Many Years
Banks and dealerships offer car loans from 1 to 7 years. The longer the loan you take, the lower the monthly payment. As I told you before, my loan was 4 years, and that is probably as long of a car loan as I would take. If you choose 5, 6, or 7 years, you may want to consider looking at a cheaper vehicle. The monthly payment on a 6 year loan may be convenient for you, but the amount you will pay in interest is unnecessary. Letâ€™s make a pact right now; NEITHER YOU NOR I WILL EVER GET A CAR LOAN THAT IS LONGER THAN 4 YEARS! Okay, we just made a smart financial decision together, I feel good. I am going to give you some numbers to show how much interest a $16,000 loan at a 6% rate will cost you, based on the length of the loan.
- Â 12 month â€“ $525
- Â 24 month â€“ $1019
- Â 36 month â€“ $1523
- Â 48 month â€“ $2037
- Â 60 month â€“ $2559
- Â 72 month â€“ $3092
I changed my mind; I am making a new pact with myself. I vow to NEVER get another car loan! I do not want to waste any more of my hard-earned money. Who is joining me with the new pact?
Now that my car is going to be paid off, I really hope it keeps running well for a couple of years!Â I’ve had to change the alternator, battery, and a few other items that have added up to about $500.Â At least I will have an extra $355 in my savings account every month from now on!