Cars are a necessary part of life for most people. We need them to get to work, pick up our children from school, bring the groceries home and a whole host of other chores that would be impossible without a reliable set of wheels. Buying a car with cash is nearly impossible for some, so sometimes sourcing car finance is inevitable. When you’re faced with the task of buying a car with a loan, the goal is to get the best deal that suits your current set of circumstances, and then pay it off as quickly as possible. So let’s tackle the first step, negotiating the best car loan possible.
1) How much can you afford?
Without taking a detailed look at our finances, how much we can afford to borrow is at best an educated guess. To get a more accurate picture of our finances, create an income and expense sheet for the previous three months, and work out how much disposable income you have each month. This will give you a decent idea for how much you can afford to borrow, and if there are any areas of your expenditure that could be redirected elsewhere.
2) Are you employed and what’s your credit score?
Put yourself in the shoes of the car finance provider who you will be asking for a loan. Will they think you’re a safe bet or somewhat of a risk? If you’ve been in full-time work for an extended period of time and have a good credit score, you’ll be in a strong position when it’s time to negotiate. If you have a history of moving from job to job, and your credit score is poor, your interest rate will be higher.
If you’re in the second category and want to reduce the interest rate, you may have to put your car purchase on hold. To improve your chances of getting a great car loan, you will need to be in constant employment with the same employer for at least six months. During that time set aside the amount you want to repay on a car loan, that way when you apply, you can demonstrate your capacity to repay it. You’ll also have a deposit saved which will reduce how much you’ll need to borrow.
Improving your credit score is a little trickier. The quickest way is to accept a loan for a higher interest rate, make all repayments on time and in full for the first 12 months, and then renegotiate the terms of your loan. If your lender isn’t willing to budge, there will be other lenders who may be more responsive and refinance your debt for you. You can find out your credit score free of charge from many online companies.
3) What does the car loan market look like?
Knowledge is power, and when you negotiate with a car finance provider for the best rate, you’re going to need as much as possible. Visit several car finance comparison sites to fully understand what interest rate you are likely to pay based on your situation, i.e. employment history and credit score. You will be able to find out what interest rates are available, and the terms and conditions the financial institutions offer. Make a list of 4-5 of the best, because these will be the lenders you’ll be negotiating with.
From the budgeting you’ve done (i.e. how much you can afford to spend each month on loan repayments), and interest rates you may be able to achieve during negotiations, you’ll be able to get a rough guide of how much you can borrow. Use an online car finance calculator to work out the amount of money you can comfortably borrow, and the length of time you will need to pay it back. This will set a reasonably accurate level of expectation for the car you can afford to buy.
4) How do you negotiate with a professional?
Every negotiation is an opportunity for both parties to get what they want. It has the potential to be the beginning of a long relationship, so it’s important for everyone to be happy. As such, there are several points that need to be adhered to throughout the negotiation:
- You need to know exactly how much you can comfortably afford to borrow, and what interest rate you are prepared to pay. Be strong about this and don’t let emotion take over. Agreeing to offers that you can’t afford because “you must have the car you’ve set your heart on” is a guaranteed route to financial stress.
- Negotiations and ongoing positive relationships are built on respect. Therefore don’t get angry and abusive during negotiations if you want a good outcome. Instead keep calm, argue your case and respect their point of view. If you can’t negotiate a deal that fits within your borrowing guidelines, walk away.
5) Wrapping up the deal
Once you’ve negotiated a car finance deal that suits you, read through the offer with a fine toothed comb. Sometimes humans make mistakes and the figures in the offer don’t add up. Also, there may be hidden fees and charges that weren’t explained to you that might add a lot of money to the loan amount. If you have any questions or concerns about the car finance offer, don’t be afraid to ask the provider for answers. If they’re not forthcoming with the details, or you get a sense there’s something fishy going on, walk away from the deal. On the flip side, if you’ve read through the offer, had your questions answered and you’re comfortable with the deal, sign on the dotted line and submit your application.
6) Do you need some help?
Even after receiving all the advice in the world, some people just aren’t comfortable negotiating their own car loan. That’s where a good quality and reputable car finance broker may be able to help. For no charge to you (brokers get paid by the car finance provider), a broker can source the best deal for your particular set of circumstances, and look after all of the paperwork on your behalf. Car brokers have relationships with many finance providers, and can often get better rates than those advertised to the general public, even if your credit score is a not as high as it could be.
Paying off a car loan debt
Once you have a debt, the best way to save money is to pay it off quickly. If you’re plan is to pay off your car finance debt as soon as possible, which it should be, you should choose a loan that doesn’t charges penalties for making additional payments or paying off the loan early. If you’re offered a great interest rate, but there will be penalties for making additional repayments, you may be better off accepting a loan with a slightly higher interest rate who let you pay it off early without penalty. This is where a good car finance broker can help. They will crunch the numbers and tell you which deal is the best based on your repayment preferences.
If you’ve secured a car finance loan that allows you to make additional repayments without penalty, here are a number of ways to get debt free quickly.
7) Make one off payments
Did you get an inheritance, or money back in your tax return, or found cash in the back of the cupboard you didn’t know you had? Don’t go on a shopping spree, instead pay it straight off your loan. Because interest is calculated on the outstanding loan amount on a daily basis, making one-off payments can put a serious dent in the amount of interest you pay over the life of the loan.
8) Pay a little extra off each time
Instead of paying the bare minimum repayment each time, why not bump it up slightly to the nearest $10, $50 or $100 dollars? Instead of paying $291.48 per month off your car loan, why not pay $300 instead? It’s not that big of a stretch, and all of those small additional repayments can have an enormous effect on the amount of interest you pay, not to mention shave months off the life of the loan.
9) Get another job
Working one job can be hard enough for many people, so the thought of getting another is not exactly attractive. But earning just a little extra money from a few more hours a week can help pay off your car loan much quicker. Is there a Saturday morning job you can do in your local community, or can you source freelancing jobs online through sites like Upwork or Freelancer? Every cent counts when paying down your debts quicker.
10) Change the frequency of repayments
Instead of paying the loan off monthly, why not pay it off fortnightly instead? This will have two profound effects on your loan:
- Going back to the how interest is calculated, the less owing on the loan on any given day will mean less interest is charged. So if you make more frequent repayments, less interest will be accrued.
- You’ll actually make two extra fortnightly payments every year. That will wipe a lot of money off the loan in a far quicker period of time.
Of course paying fortnightly will mean your repayments are slightly higher, but if you want to pay off that loan quicker, this is the best way to do it.
11) Time to say goodbye to some belongings
If you look around your house or apartment, you could probably find an item or two to sell. Is there a local Trash And Treasure market you can sell at, or upload them to an online selling site like eBay or Craigslist. Whether you get $20 or $2,000 for your items, pay it straight into your loan. Even the smallest repayment amounts can have a drastic effect on how much you pay back over the life of the loan.
12) Time to renegotiate
If you’ve been with your lender for a while, and you’ve made all of your repayments on time and in full, then you’re in a position of power to renegotiate the terms of your car loan. You can ask for the interest rate to be reduced, or remove the conditions that preclude additional repayments being made. If your car finance provider doesn’t come to the party, there’s a good chance a rival will, so shop around.
No one likes to be in debt, but if you have to, ensure you get the best deal available and then pay it off as quickly as possible. By doing so you can get the car you want while improving your credit rating at the same time. Good luck…
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.