4 Things to Know About Car Loans All Posts / Frugal Living / Saving Money

Car loans suck.

I do NOT generally recommend them, and I advise that you pay cash for cars whenever possible.  Cars lose their value quickly, and taking out debt for a depreciating asset doesn’t make much sense.  My hubby and I had never had a car loan.

Up until a couple of years ago, we were both driving old cars.  I still drive my 2000 Oldsmobile, but the transmission in my hubby’s 2004 orange Grand Prix (The Pumpkin) died.  We sold The Pumpkin and carpooled while we quickly saved up cash for a $4,000 Smart Car…which crapped out on us 10 months later.

red smart car

The Smartie

The Smartie needed a new engine, which would’ve been a $4,500 fix…that’s right, more than we paid for the car itself!  So we sold the Smartie for $300 (to a mechanic who can do the repairs himself) and we decided to take out a car loan.

Carpooling is no longer an option because my car has a major overheating problem and can’t make the long commute to my hubby’s work (luckily, I have a very short commute).  Since we didn’t have cash on hand (we’re throwing everything except our $1,000 emergency fund toward our student loans), taking out a loan unfortunately seemed like the best option at this point.

We are going to be making some MAJOR changes to the way that we handle money so that we can pay this off ASAP.  Our goal is to have the car paid off by January and the remainder of our student loans paid off by December of 2018.

While I recommend paying cash for a car whenever you can, I understand that it’s not always possible.  If you do decide to take out a loan, I suggest paying the loan off as quickly as you can and making sure you have all of the information you need in order to make an informed decision.  Here are four things to know when taking out a car loan.

The Basics

Of course, you will first need to know the basics.  What will your interest rate be?  What is a reasonable interest rate given your credit score?  What is your repayment schedule?

Choose the shortest term that’s possible for your financial situation.  If you can pay the car over 4 years instead of 6, you can save money in interest and pay less overall.  While it’s easy to be lured in by a low monthly payment, make sure to consider the entire cost of the car.

Keep in mind that sales tax (which will be several hundred dollars) and other fees will be added to the cost.  If you can, try to put down a sizeable down payment on the car.

Financing Options

Do not finance through the dealer.  This is more expensive.  Instead, get your financing through a bank.  The dealerships typically work directly with the banks and will compare numerous options to get you the lowest interest rate.  The dealership we went to works with 30 different banks.

Upselling

Salespeople get paid a commission, so they have plenty of incentive to get you to buy more.  They will try to get you to purchase “add-on” packages with extended warranties and other unnecessary perks.  This might be “only” $50 or $100 more per month, but keep in mind that this will increase the total amount of your loan, which means you’ll be paying more in interest.

Say no to anything you don’t want and be firm.  Ask questions about things you don’t understand – before you sign the paperwork.

Paying it off Early

If you want to pay the loan off early (which I hope you do!), make sure you ask a few important questions.  First, make sure the loan does not have any prepayment penalties (some banks will charge you a fee for paying off a debt early).  I confirmed this verbally with the salesperson and made sure I could find the language on the loan paperwork before we signed it.

I also verified that the interest is not frontloaded.  “Frontloading” interest means that the interest is paid at the beginning of the loan payoff.  I’ve learned the hard way (through my student loans) about what a nightmare frontloaded interest is.

Because it’s all stacked at the beginning of your loan payoff, this means that you make very little progress when you first start paying off your debt. The majority of your monthly payment goes to interest and only a small amount goes to principal.

Over time, this balance shifts and you will finally start to see your principal loan balance start to decrease significantly.  If you want to pay off a loan early, it will be easier to do so if the interest is not frontloaded.

One Last Thought

Debt sucks, and it’s best to pay cash whenever you can.  Unfortunately, life can take some unexpected turns and we don’t always have the ability to pay cash for some of the large expenses in life, like a car.

If you take out a car loan, make sure you have all of the information you need to make an informed decision.  If you can, I highly recommend paying the loan off early!

Do you have a car loan?

Other stuff you might like:

My Personal Finance “Aha” Moment
5 Reasons to Refinance Your Student Loans
Why I Started a 3 Year Spending Ban
How to Start a Blog in 5 Easy Steps
10 Ways to Make an Extra $500 Each Month


Comments

  1. When we suddenly needed a new car a little over a year ago, we took out a loan, and it was one of the best financial decisions we’ve made recently. We had a shot at a low mileage car that was less than a year old, and which was selling for noticably less than a new car–basically someone else paid the “drive it off the lot” depreciation. We had just used our savings to buy my daughter a car so we would have had to liquidate assets to pay cash for this car–or we had enough cash for an older car that would presumably have higher repair bills. Because of our credit union membership and our sterling credit we got a 1.5% interest rate for three years. In the last year, our assets have appreciated over 15%.

  2. I’ve had to finance a car, and I typically don’t recommend it either. BUT, if you can get a really good interest rate, and not have front loaded interest, you can really get ahead as you’re paying it off. I also recommend paying it off ASAP, cause then you have the opportunity to really save should you need to get another car (or for the future)

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