Last week I received an email from a woman who was looking at getting rid her car loan. Julie* shared her story with me and gave me permission to publish it.
I currently have a $15,000, 6 year car loan for a 2011 Kia at an interest rate of 18%. I pay about $340 a month on the car. I had considered refinancing it next year with the same company. I don’t know if I would be able to go through a credit union or bank since my credit is so low.
While I shared some tips on how to get out from an upside loan. We paid off our car loan early years ago and have since bought our cars with cash. However I know not everyone is in the same boat and some may car loan so they can have a vehicle to get around. I want to discuss how to you can avoid getting a car loan that will drain your budget.
Before you head out to search for the car you should do a bit of legwork to give yourself the best chance at getting an affordable loan. don’t just go by what the dealership offers you. Lenders and car salespeople are looking at their numbers, not yours.
It doesn’t take much time to run the numbers. Just remember that besides having enough to pay the car loan, you want to make sure you have a budget that allows you to still save and invest for the future. One rule of thumb you may want to use to keep your budget sane is the 1/10th rule. don’t buy a car for more than one tenth of your annual income.
Once you have a budget that you know will not only pay the car loan, but handle other financial responsibilities, stick with it. Don’t let anyone else dissuade you from keeping your payments manageable and allowing you to have a buffer in your budget.
Besides the car payment auto related bills like insurance can eat at your budget if you don’t account for them. If you’re pressed for time, but still want to shop around for the best rates on car insurance you use Go Insurance Rates. It’s extremely handy as you can get several quotes in spot and it’s free!
Build a Down Payment
If you can give yourself some time to get a down payment ready, then by all means do so. The more you can save up the better. Aim for at least 10% down so you have more options on the car that you want.
For your down payment fund, you need to focus on 3 things:
- Easy access to it in case of emergency – It does you no good to have a high interest rate if you can’t get to it quickly when it’s most needed.
- Safe place to store you money – Whatever you choose, make sure it’s either covered by the FDIC (banks) or NCUA (credit unions).
- A place where it can grow – If you can earn a decent interest rate for your savings while meeting the two previous criteria, then go for it.
One bank that we use for our savings is Ally Bank. they offer competitive rates and they don’t hit you with maintenance fees.
Look at Getting Pre-Approved
The final step before going to a dealership is sitting down and talking with your bank or credit union. You want to get pre-approved for a loan so you have negotiating power when you buy your car. The rates offered at the dealerships are often much higher than you would get at your local bank.
You will also have an out when the salesperson is trying to talk you into a car that you really can’t afford- you simply say that you want to stay within your pre-approved budget.
Getting an Affordable Car Loan
If you can buy your next car with, then by all means, please do so. If you are getting car loan, then I hope these tips help you with avoiding a bad one.
I’d love to get your thoughts on cars and loans. How do you plan on buying your next car?
* I changed the reader’s name adjusted some details to maintain privacy.
Photo Credit: Main