A car loan is arguably the worst debt you can ever acquire. Borrowing a ton of money to buy a steadily depreciating asset is either a lifestyle choice or an economic necessity, but it is rarely an investment decision. While owning such a liability is not entirely impractical, it usually depletes, not increases, your wealth.
Since a car is likely to decrease your overall net worth, it is imperative to minimize your costs to purchase it. To obtain the most favorable Ford, Toyota, or VW vehicle finance possible, ask yourself the following essential questions:
Could You Use Your Parents?
Before you shop around for in-house and bank loans, find out if you could borrow money directly from your loved ones. Even if you have to repay your mum and dad extra for the privilege, you are still going to save a considerable amount of cash on interest.
If your parents can’t provide you the funds you need to close your vehicle purchase, ask them if they are willing to be your guarantors. Being a guarantor means shouldering your financial obligations if you default on your car loan. Your guarantor can add another debt security to the equation to reduce the risk your lender has to absorb by taking you as a customer. As a result, you might be able to snag much lower interest than you are eligible for with your current credentials.
Of course, using your parents as guarantors is not without dangers. If you end up being delinquent and your mum and dad can’t take over your repayments, they can lose the collateral they use.
How Much Can You Afford to Pay Monthly?
Sometimes, vehicle ownership is more about your capacity to repay than your eligibility for a vehicle finance. Finding the balance between what you can afford to pay monthly and how much interest you are willing to accept can be difficult.
If all you want is to lower your repayments, they can be made easily manageable by agreeing to a longer term. The more time you need to pay down your car loan, though, the high interest you pay overall. You can shorten the duration of your loan to shrink its interest portion, but it will inflate your installments.
To avoid paying too much to buy something that drops in value, find out what you can realistically set aside to cover your regular vehicle expenses, including petrol, insurance, and maintenance.
What Are the Fees Included in the Deal?
Lenders charge additional fees that cause the overall cost of borrowing to balloon. Although they are expected, many of them are not clearly stated or explained. Make sure you are aware of every single fee you are required to pay and do not shy away from negotiating to get rid of them.
Could You Pay Extra Whenever You Want?
Payment flexibility matters. Whether you can get the interest rate you like or not, ask your lender if you could make extra payments. This way, you can cut down your loan’s principal amount more quickly whenever you have a cash surplus.
Some lenders can penalize you for this, so do not assume anything. Make sure you understand the prepayment provision in the contract, if there is any, before signing it off.
A bad car loan can bury you in debt and ruin your credit over the long term. Explore every avenue to reduce your expenses and save cash, and do not make any rash decision.