So, you’ve done your shopping, found a car, and have been approved for a car loan, congratulations! Now, it is important to structure that loan with the best long term outcome for you! There are a few things you can do to structure your loan that will save you both stress and money, and help you to avoid ever being “upside down” on your new car.
Let’s start with your down payment! Your down payment should definitely be within your means and should not affect your ability to pay any of your other current expenses. If a 20% down payment isn’t feasible at the time, putting down whatever you can afford will be helpful, as any down payment lessens the amount you are borrowing. You may have seen “zero down” offers at many different dealerships, and while that’s tempting, it could also be very risky. For instance, if at some point you decide to sell the car, that may not be possible if you owe more on the loan than the market value of the car at that time. Larger down payments can help ensure that’s never the case.
Secondly, your loan term should be as short as you can afford it to be. A lower monthly payment isn’t decreasing the cost of the car, it’s just extending the terms of your loan. While a lower monthly payment is appealing, the interest you’ll pay is not. Such as the down payment, this should be within your means and compatible with your current expenses. However, if you are financially able to increase your monthly payment, doing so will save you hundreds, if not thousands, of dollars in the long run. In addition to that, the more interest added to a loan, the higher the chances of being “upside down” on your car, meaning you owe more on the car than it is actually worth.
Financing a car comes with taxes, fees, and extended warranty costs, if you choose one. These are often overlooked until the end of the car buying process. Account for these fees ahead of time, and ideally you should pay for them in cash, if you are able. While it’s easy to add some, or all, of these costs into your financing, this, in turn, increases your loan amount, meaning more on your monthly payment and more interest added to your loan. Covering your taxes and any fees in cash, rather than financing them, will save you a significant amount of money over the course of your loan.
Lastly, if you were unable to do a higher down payment and shorter loan term, Gap Insurance may be beneficial for you. Gap Insurance (Guaranteed Auto Protection Insurance) covers the difference between what your insurance company is willing to pay for your car and what you still owe on your loan. If you were to ever be in an accident where insurance declares your car a total loss, Gap Insurance would protect you from being stuck paying the remainder of what you owe on your loan. Check with the dealership or your insurance agent to see their prices and policies for gap insurance.
Overall, you should structure your loan in the way that suits you best financially, both presently and in the long term. It’s important to take the time to set up your loan in the way that best aligns with your financial goals, whatever that may be. Save yourself some long term stress, but most importantly, enjoy your new car!