Five Questions to Ask When Getting an Auto Loan

The right questions can get you the right deal

In the market for a new car? Car shopping probably has you focused on questions like, What kind of car do I want? What are the safety ratings? Leather or cloth interior? However, a main question you should be asking yourself is, How am I going to pay for this car?

If you’re like most people, you probably plan to use an auto loan to finance your new purchase. And if that’s the case, you’ll need to consider a few questions beforehand to make sure you’ll be able to afford the car you want and won’t encounter any negative blows along the way.

“The big mistakes are made in the financing office,” explains Phil Reed, the senior consumer advice editor at Edmunds.com, the auto research website. “Making the right decisions can save thousands over the life of the loan.”

To make sure you’re making the right choice regarding an auto loan, here are five questions to ask before you sign the dotted line:

1. What is the type and amount of the interest rate?
With any type of loan comes an interest rate. But all rates are not the same – they vary among factors like your credit score, how much you’re putting down on the car, etc. A fixed interest rate is when your payments stay the same throughout the term of your loan. This type of loan is preferred among many since it makes budgeting easier, since you’ll always know what you owe. A variable interest rate, however, changes, so repayments may differ in amount. To avoid future headache-inducing surprises later, find out the type of interest rate you’ll be paying off before you complete the deal so you can factor it into your budget. The interest rate percentage is also important to know because it can vastly impact your monthly payment amount. Knowing what the interest rate is will help you determine how much interest you’ll pay over the life of the loan.

2. What is the loan’s term?
A term is the length of your repayment period. Finding this out is essential because some finance contracts require that there be a specific time period, typically two or three years. If that’s the case, your monthly payments will be higher. For some, it makes more sense to have lower monthly payments over the course of additional years, say five or six. For example, say your loan is for $18,000 at a 10 percent interest rate. If your term is 24 months, monthly payments will be $887. But if your term is 36 months at the same interest rate, monthly payments will be $615. Talk with your auto loan provider to determine what’s right for you.

3. What will my monthly payment be?
For the same reasons as knowing your interest rate beforehand, find out what your monthly payments will be. Make sure the dealer factors in the interest rate and any other fees bundled into that payment. For instance, if you’re purchasing add-ons to your vehicle, like fabric protection and paint sealant, that is an extra cost that should be calculated into your repayments. It’s important to understand the exact amount that you’ll be paying each month.

4. Are there penalties and fees I should know about?
Ask the finance company or lender if there are any additional costs that haven’t been presented yet on the loan. If you’re interested in paying off your car early, find out if there are any prepayment penalties you’ll ensue. Also ask about late charges as lenders will typically charge a fee if you’re late on your payments. The amount varies, but it could be around five percent or more of the unpaid portion of your monthly repayment, or a specific dollar amount. Also, there may be an establishment fee, which is the cost to set up a loan, or a monthly account keeping fee, a monthly charge to cover account keeping costs.

5. What documentation do you need?
To apply for a loan, you’ll usually need to provide several documents, for example, proof of income. Also, you may need to acquire comprehensive insurance coverage. Find out what kinds of documentation you’ll need to provide, and also if there’s anything that may delay the loan approval processing, such as past credit issues, repossession or bankruptcy. Make sure when signing the loan agreement that you read all the fine print and understand what it all entails. If you don’t understand something, ask questions to clarify.

Most of the time, your financial institution is a better bet when it comes to auto loans. You don’t have to worry about someone trying to take advantage of you either. If you’re looking to purchase a car and are in need of an auto loan, contact us today to see how we can help you.