Chapter 2. How do I shop for a car loan?

You might not think that it matters, but shopping for a loan to make a major purchase is closely related to your credit score, also known as FICO. The higher your credit score, the better the interest rate you might be able to negotiate with your lender. Therefore, prior to applying for a loan, research your credit history and your credit score. You might have to wait on your purchase if you need to repair your credit score or correct errors on your credit history. To get more information on FICO, refer to our module on the FICO score. 

 

How to

 

Shopping for a car loan can be a coordinated effort with shopping for a car, if you are seeking dealer's financing. But before you commit to anything, take your time to fully understand the following terminology you might encounter as you compare various deals:

• Annual Percentage Rate (APR): refers to the interest rate you will be charged as a measure of the cost of credit, expressed as a yearly rate (10%, 14.3%, etc.,)
• Length of loan: refers to the number of months/years to pay off the loan (48 months, 60 months, etc.,)
• Monthly payment: a calculated monthly amount that includes principal and interest; payments are applied to interest first, then to principal to reduce outstanding balance amount
• Total cost of loan: the sum of all payments over the terms of the loan (interest and principal)
• Total finance charge: interest cost to carry the loan to term, including all charges.

You also need to decide how much of a down payment you are willing to put down. The higher your down payment, the lower the total cost of financing a loan. You also need to decide for how long you want to finance your loan. That will depend on your budget and on your willingness to tolerate how much interest the loan will cost you. Remember, the longer the terms of payments, the more interest you will have to pay over the life of the loan. Compare different scenarios to help you make informed decisions.

 

 

As a consumer, you are protected under the Truth-in-Lending Act of 1968. It is a U.S. federal law designed to promote the informed use of consumer credit by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated. It requires lenders to provide you with loan cost information so that you can compare various types of loans. In addition, each state has "lemon laws" to protect buyers of new vehicles from getting defective vehicles. If you are buying a new car, you need to investigate the lemon law applicable in your state.

 

Practice

Now that you know how to protect your asset and your money, think of paying it forward and discuss your experience in buying a car with a friend or a family member.

 

Congratulations! You can move on to Chapter 3. How do I prepare for the buying process?

To review the full module on Car shopping, click here.