An auto loan can help you build credit and negotiate a deal on a new or used car

COVID-19 continues to have a major impact on how we view car ownership. For many, owning a vehicle, and maybe more than one, is now essential. Here are some tips and tools if you’re in the market.

Sales of used cars are up. Budget conscious consumers can benefit from a trickle down glut of 2019 and 2020 models, while environmentally conscious consumers can feel good about a more sustainable purchase.

If you have to take out an auto loan to buy your first or next car, consider getting a pre-approval before going car shopping to help understand how much you can afford. Here are more tips for making your next car purchase go smoothly at a cost you can afford.

Choosing your next car

Having a clear choice for the make and model of car you want is the first step to negotiating with confidence. Make a list of your needs—space, safety features, fuel efficiency—and find out what car will be the best fit.

When you are buying a used car, your research should include an investigation into the individual vehicle you want. You will need a vehicle history report, such as a Carfax or AutoCheck report, which records a major accident or title issues the car might have had. When you buy a used car from a dealer, you should be able to take the car off the lot and have it inspected by the mechanic of your choice before making a final decision.

How much should I spend on a car?

One way to avoid taking on a bigger car loan than your budget can comfortably absorb is to apply the 20/4/10 rule: You should be able to make a 20% down payment, pay off your loan within a four-year term, and that monthly payment should not be more than 10% of your gross income. For a total budget picture, you should also calculate your monthly costs for gas, insurance and maintenance.

Where should I shop for an auto loan?

An auto loan for a new or used car can come either directly from a financial institution or from the dealership. Beware of special low or 0% financing from a dealer. Often these promotions mean the dealer is less inclined to bargain down the retail price of the car.

Wherever you apply for your loan, be ready to provide a number of documents to prove your identity, ability to pay (employment history, bank account statements).

How interest rates affect the terms of your loan

The interest rate is what the lender charges you to take out the loan. Loans for used cars often have a higher interest rate than loans for new cars. According to TruCar, the national average interest rate on used vehicles this past month has been 8.1%, two-and-a-half points higher than the average rate for new vehicles.

Many lenders recommend that those buying a new or used car should focus on obtaining the lowest price for the vehicle, then connect with a lender to determine if refinancing the dealer’s loan at a lower rate is possible. This way consumers get the best of both: the lowest car price from the dealer and the most competitive loan rate financing their purchase.

Remember: lenders are not legally required to give you the best rate available and your final rate probably will be based on your credit score.

Keep in mind that lenders are legally required to provide the following key details about a loan before you sign:

• Annual percentage rate (APR)

• Amount of the finance charge and how this amount was determined.

• Total amount to be paid, including down payment, remaining balance and interest

• Remaining amount of money to be financed after the down payment

Experienced car buyers recommend that you visit a car dealer with a lender’s pre-approved loan letter to help you leave faster and with a better closing price. When negotiating the final price, important topics to ask the dealer are:

• Whether you can qualify for a lower APR than a competing lender

• Manufacturer incentives or deals from carmakers to compete with other brands

• Available rebates, specials, and discounts

Closing the deal and driving away

Reading the terms of your auto loan before you sign is a good practice and will be your last chance to make any corrections and ask questions.

To avoid any missed payments, set up automatic payments on your loan if you can. If you know you are going to miss a payment, get in touch with your lender as soon as possible. At Evergreen Credit Union, most loans come with a once-a-year “Skip A Payment” benefit.

Your lender has a lien on your vehicle, and in some cases actually holds the title until the loan is paid off in full. When you make your last payment, you should obtain the car’s title and keep it in a safe place.

FINANCES FYI is presented by Evergreen Credit Union, serving all Southern Maine and committed to helping Mainers of all ages better manage their financial lives.