While cars aren’t becoming any cheaper, more people need a car to jump their productivity now more than ever. However, few car buyers can afford to buy a new car upfront. So when it is time to upgrade to a more dependable car, you want to be smart and fetch the best auto finance plan you can get.
So how do you get the ideal auto financing for you or auto loan?
We share expert yet simple tips you can use in two distinct scenarios to help you save on your next car financing package.
Now while many car buyers will invest remarkable time and effort into comparing buying prices, many do not calculate the entire cost of their car loan.
That total cost takes into calculation the interest you are obligated to pay up over the payback period you agree on in the fine print.
Now that that`s clear, let`s delve right in.
- Getting the Best Auto Loan to Upgrade Car Parts
There are a couple of considerations you`ll want to make here.
For example, do you want to take up a car loan to upgrade your car interior or spruce up parts of your car or get another car?
Upgrading parts or technology in your old car can be quite straightforward. Either:
- Finance upgrades from your pocket
- Take up a loan on top of your current auto financing plan, or
- Get a separate car upgrade loan online, especially if you have a positive equity (discussed further below)
- Getting an Affordable Car Loan to Upgrade a Car with Financing Owing
Typically, it is trickier to sell a car to buy another when you are yet to clear your old car`s loan—selling a car with finance owing.
Can you sell a car under finance? You can upgrade a car while on finance. And you can trade in a car with finance outstanding. You can do both successfully with the right information.
The key aspect to examine here is how much you owe your current car’s dealer. You’ll want to ask them if your old car`s selling price would cover its outstanding debt. If it can, you are in the green and can sell it, repay the amount owed, and consider taking another loan for an upgrade.
But if you are obligated to sell your old car fast and its selling price would not cover the outstanding credit, you can still get a good deal. This is referred to as an upside down scenario, where your old car`s worth is less than its outstanding car loan.
The difference between how much you owe and how much you can currently fetch for your old car is known as equity, and an upside-down scenario implies a negative equity on your financed car.
How to Upgrade Your Old Car When Upside-Down
If you are in an upside-down shopping scenario you are not alone.
In fact, Edmunds reported in November 2016 that the number of upside-down car exchanges had increased by 2% from 30% in 2015. Edmunds indicated the average negative equity at the time car owners made the trade in amounted to $4,800.
About 25% of buyers who traded in an old car for a used car still had an average negative equity of $3,600 at the time of trade in.
But they still got another car from a dealer.
- By writing a check to clear the outstanding credit
You can first clear your car loan, so you can exchange your old car for a new one. But an upside-down scenario means you are likely to take up more in auto financing than pay with cash--which you might not have. Furthermore, that would mean more debt.
- Fast-forward the negative equity to the new car
Alternatively, you can roll the outstanding car debt over to the new car’s arrangement. That means you`d take a longer time to build a positive equity on your new car, though. So should you want to sell the new car a couple of years in future, and before you cleared its loan, you`d need to repeat the above process for selling a car with negative equity all over again.
It can be an expensive affair, one that can see you stuck in debt for a longer stretch of time than necessary.
Besides, dealers usually spank a higher interest (APR) rate on car loans for upside-down cars. So the longer it takes to clear the loan, the more expensive your car will cost you in the end—not to mention you`ll be less likely to trade that car in future since it would have a worse negative equity than the first.
So what do you do to secure an affordable car loan to upgrade your car and totally love it?
- Be Mindful of Affording the Car
Auto dealers know many people will buy a car they do not need, but one they want. That means many people will buy what their credit score says they can purchase instead of what their income says they can afford.
The latter option is the smarter way to upgrade your car.
- Choose the Shortest Repayment Period You Can Handle
Research firm Kelley Blue Book estimates the average new car price to be $35,000. Since cars have become costlier, more buyers are opting for longer payments to gain pricey, new cars. Experian Automotive reports the average new car loan for buyers with a good credit score is 68 months and 63 months for used car loans.
Opting for a shorter, 3-year car loan repayment plan would save you over $2,000 in interest rates with many car dealers.
- Making a Significant Down Payment Changes Things
While having good credit will help you get a cheap car loan, paying a down payment of about 20% on the ticket price will significantly cut your new car`s total cost—especially in auto financing.
If you are not in an upside-down scenario, a down-payment will help you choose a shorter loan repayment time as well. While the monthly payments will be higher than for a longer plan, you`d save significantly more—which is much worth it.
To get the best auto loan to upgrade your car, you`ll want to be honest with yourself about your finances. If you want to trade in your old car while owing, you can either clear the negative equity out of your pocket, roll the outstanding credit to the new car, and opt for a car you can afford.
That would keep you out of a vicious debt cycle, and allow you to exchange the new car again (if you must) before clearing the car loan.
If not in upside-down car shopping, opting to make a down payment and settle for a shorter repayment plan will definitely save you thousands of dollars in auto loan costs.