Car loan payments are a major expense for many families. Here are three tips to reduce the cost of borrowing money to buy a car:
1. Borrow as little as possible by making the largest down payment that you can afford. If necessary, consider buying a late model pre-owned car instead of a new one, selecting a less expensive make and model of car, or delaying the purchase to save more money for the down payment. Vehicles that have never been privately titled, such as dealer demonstration and car rental company vehicles, typically qualify for the new car interest rate. Contact car rental companies and ask for the sales division and call local dealers to inquire whether demonstration vehicles are available that may meet your needs with respect to car size, function, fuel efficiency, and maintenance characteristics.
2. Choose the shortest term car loan that you can afford to save on interest charges. When loans are stretched out beyond 48 months (four years), it is very easy to be "upside down" for a long period of time. This means that you owe more more than your car is worth because early payments cover mostly interest. The way to avoid being "upside down" is to shorten the length of the car loan or make a larger down payment.
3. Separate borrowing decisions from purchasing decisions. Check with your bank, credit union, or other financial institution for a pre-approved loan. Interest rates and credit terms at these financial institutions will often be more favorable than those offered at the car dealership. Obtaining a pre-approved loan will assist you in staying within your purchase budget. In other words, don't just accept the financing arrangement offered by a car dealer. Shop around for the best terms by comparing loan terms with banks and credit unions.
4. Avoid trade-in deals that include paying off the existing loan balance on your trade-in. If the balance on the trade-in exceeds the car's true value, the excess loan amount on the trade-in will be added to the new car loan, creating a situation where you will be "upside down" on the new car.
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