Car Loans
Most consumers will apply for a car loan these days when they are purchasing a new car or even a used car. Cars are so expensive that most of us just do not have the ready cash sitting around to pay for a car. As a result we apply for car loans at our local bank, through the car company where we are buying the car or a separate online loan of some kind from a lender that specializes in car loans. Most car dealers have arranged financing for any car they sell through a preferred bank or lender to facilitate car sales. Some may even get a finder’s fee for bringing a qualified customer to the lender. You can pretty much arrange for your car loan right at the dealers dealership and have your car loan approved within a few days.
When we purchase a new car there are lots of details to discuss and to make decisions about. Most of them are focused around the car that we are purchasing, the features, the packages, the accessories and the price, and of course how fast it will go. The warranty, the service required , any recalls that are known etc are just some of the things to think about. Sometimes our emotions get involved and we just decide that we want this car with all of the features and do not worry too much about the price or the financing.
Our emotions get in the way of making a sound financial deal and even negotiating a good price for the car. It might be our first car or a car that is a significant upgrade from the previous one. We decide that we really want this car and once the salesman knows this, he knows he has a sale and can negotiate for a higher price. Once our emotions kick in it is very difficult to step back and even walk away from the deal if it does not meet your objectives.
In reality there are two deals that you are arranging when you purchase a car. One is the car of course, the options and the price. If you have a car to trade in, the value of your trade is another factor to consider. The other is the financing which is really a car loan that is a secured personal loan with the car as collateral. Using the car as collateral allows the lenders to provide an interest rate that is often lower than many other types of loans. It allows them to create great financial deals for their customers and they can get a monthly payment that is low enough to be attractive to many customers.
Auto Companies Subsidize Car Loans
Sometimes auto companies will subsidize car loans in some manner in an effort to enhance sales at a time when sales may be slow. Extremely low interest rates may be available and all fees waived in an effort to make the car price attractive and enhance the opportunity to sell cars. Recently car companies have been offering interest free loans to buyers, which are a phenomenally low interest compared to past years and represents a significant savings opportunity for consumers. Your monthly payment cannot get much lower, with your interest rate at historic lows and extending your term out as far as possible. Interest rates are rumored to be increasing in the next few years so the time of interest free car loans may be ending.
Credit is relatively easy to get, provided that you have a reasonable credit rating and that you are working. You need to have a bank account for the payments to be deducted from, sometimes a down payment, however you can often negotiate a car loan with no down payment as well. Many people will focus on the monthly payment for their car loan and whether they can handle that monthly payment along with all of their other expenses. They sometimes forget about the actual deal they are negotiating for the car or for the car loan.
Are Zero Interest Car Loans Really Zero Interest
Let’s say you have finalized the price of a new car and are being offered a zero interest loan. The cost of the car is $24,000 and you have a zero interest loan for 4 years or 48 months. The monthly payment is going to be $24000 divided by 48 or $500 a month. This deal sounds very good doesn’t it?
The only way to tell if you are receiving a zero interest loan is to offer to pay cash for the car and ask what price they are would sell the car at. Many times, the dealer will offer a lower price to make a cash deal. Now this leads one to wonder if this is really a zero interest loan or not. If you have the cash, and the cash deal is a lower price, roughly equivalent to what the normal interest cost would be, take the cash deal. Most people who have the cash these days cannot invest it in any investment that pays anything reasonable in terms of income.
If you do not have the cash, take the zero interest car loan unless you can find a another car loan that will cost you less than the difference between the cash deal and the interest free car loan deal negotiated through the dealer! If the cash deal and the interest free cost of the car are the same, you are either a bad negotiator or it really is a zero interest car loan. If the cash deal is lower, then they are just collecting the interest a little differently. Technically it is not interest, but they are making a little more money on the car deal.
If you have to borrow the money to obtain this lower cash deal, evaluate how much interest you will pay for the separate loan. If the cost of this loan is less than the difference between the interest free loan cost of the car vs. the cost of the car on a cash deal, then you are better off taking the separate loan. It all sounds very complicated, however going through these negotiations takes a bit of time and it can save you money in the long run. Consumers need to do the math to assess these car loans to make sure they get the best deal for both the car and the car loan. Remember leave your emotions at home and focus on the deal!