Things to consider before taking out a car loan

BUYING a car is one of the biggest and perhaps even one of the most important personal investments that you will make; second to your purchase of a house, of course. And while you may wish that you could pay for that dream car out of pocket, the reality is that most people will rely on an auto loan to make this dream a reality. However, banker Vaughn Levy said that while on the surface a car loan may seem like a simple contract before you start the car buying process, there are a few important things that you should consider.

Do you need to buy a car now?

A car is generally a luxury item; it loses value the moment you drive it out of the lot and as such you must first ask yourself if you absolutely need it before you make a decision to get a loan. Is your purpose for buying a car a means to make some extra cash, or is it beneficial for getting you to work based on distance from work? If so, then a car is necessary and you can feel confident going forward with your car hunting.

Are there fees that you will be required to pay upfront?

Some lending institutions not only require that you make a downpayment, but that you pay some processing fees as well. The downpayment or deposit is usually a percentage of the value of the car. The processing fee, on the other hand, is the fee that the bank may charge to process your loan request and make associated checks, like confirming your employer or checking with a guarantor.

Can you really afford a car?

You love the idea of a car and it really is more convenient than taking the bus, but a pay increase does not mean that you can afford a car and you want to make sure you don’t end up slipping into debt because of convenience. You must remember that a loan is pretty expensive to pay back, and with long-term loans, you could easily become frustrated. You don’t want to sacrifice especially your savings when you don’t need to.

What type of car are you getting?

It’s good to buy vehicles that keep value so if you decide to sell, you will get a decent deal. You also want to consider the year of the car that you are getting. There are issues such as cost of car parts as well as for repair, whether or not the parts can be sourced easily, and of course whether or not resale will be a challenge.

Are you getting the best deal?

Even before you engage a bank, check with a car dealer and negotiate the price that you are interested in. The fact is that some dealerships are aligned with certain lending institutions and you don’t want your transaction to be tainted by the business that they have. Dealer arranged financing can affect the price of the car negatively.

What is the final price that you will have to pay for the vehicle?

The truth is the interest rate might be quite attractive but some lending institutions have a way of “padding the bill” — they attach sizeable prices for processing, documentation, prepayment and default in payment, for example. This, of course, all contributes to the final price of the car. What the borrower should do is to estimate the final payment that he/she will be required to make against the cash price to see whether or not the purchase makes sense, all things considered.

Can you cover all the financial obligations of the car?

You must consider not only whether or not you can make the monthly payments, but if you will still be able to maintain your lifestyle. You must also consider that you will have other expenses such as car insurance and car maintenance, and unfortunately, these run concurrently with your monthly payments.

What are the interest rates?

The interest rate on a car loan varies depending on the lending institution. You want to make sure that you are taking up the best offer because a loan is a big responsibility. To make sure of this, compare lenders before settling on a loan offer and if you are in the financial position to, choose a shorter loan since longer-term loans tend to attract higher interest rates.

Are there pre-closure penalties?

Chances are you want to complete the payment for your car much earlier than you agreed to in the original terms. Fees may be applied to this. This is particularly important for borrowers who believe that they might want to trade in their cars for a newer version, for example before the end of the first contract.

Will late payment fees be applied?

While your loan officer might not say it during the initial discussion, you may find that if you ever make payments late you’ll see additional charges on the loan. It is important that you not only read the fine print, but always ask to make sure.

Remember, life happens

Just in case you forget, remember that life happens. This means that you can lose your job or you may be faced with additional expenses that might eat away your monthly car payments. Consider whether or not you have enough money saved or have another way of paying your monthly instalments because if you are behind on payments the bank/lending agency can impose a late payment penalty and charge additional daily interest on the overdue amount. Also, defaulting on a number of payments is interpreted by the lending institution as a failure to honour your car loan agreement and they may take action (usually through a bailiff) to repossess the vehicle.