Three Bad (and Better) Options for Financing a Car

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Car loans suck. Cars are depreciating assets — that means the moment you drive off the lot, your shiny car is already worth less than you owe. And you’ll still be paying off that loan when your car has 50,000 miles on the odometer and coffee stains on the passenger seat. If you have to get a car loan, make sure you get the best deal you can, and avoid high-interest traps. Here are three of the worst — and the best — options for financing a car.

Bad Idea: Financing a Car With a Five-Year Loan

If you could get a three-year-old Honda Civic or a brand new Toyota Camry for the same monthly payment, which one would you choose? The Camry, right?

It’s a trick question. The length of the loan is what really matters here. “A $25,000 car with a five year loan has the same monthly payment as a $16,000 car with a three year loan,” Credit.com points out. If the interest rate is 3 percent, you’ll pay around $450 per month for either loan. But if you opt for the longer loan on the more expensive car, you’ll end up paying $1,200 more in interest over the life of the loan.

Better idea: Opting for a shorter loan — and a cheaper car

Car dealers push the five-year loan hard. Not only do they want you to pay extra interest, but they know they can convince you to buy a more expensive car if they can sell you on the low monthly payment. Don’t let them fool you. Choose the shortest-term loan you can safely afford. You’ll save money on interest and you’ll build equity in your car faster.

Bad idea: Financing a car with a bad-credit car loan from the dealer

So you’ve been late paying your credit card bill a few times. And one time you forgot about it entirely. Whoops. Long story short, your credit score’s about as appealing as roadkill. If you want to buy a car, you may have to turn to a lender that specializes in bad-credit car loans — and you’ll pay for the privilege.

In 2015, the average interest rate on a subprime car loan was close to 11 percent, according to Interest.com. The average rate for a “deep-subprime borrower” (the nice way of saying people with credit scores under 500) crept up to 14.5 percent.  At that rate, you’d pay more than $4,800 in interest for a four-year, $15,000 loan. If you show up at a car dealership, pick the car you want and then confess your credit sins, chances are the dealer will offer you a high-interest loan. Some shady dealers will even try to stick you with a loan they know you can’t pay and plan to repossess your car.

Better idea: Financing a car with a bad-credit loan you secure ahead of time

Even if you have bad credit, you don’t have to accept the dealer’s terms. Instead, get approved for a loan before you go car shopping. First, check your own credit report for free at annualcreditreport.com — even if you really don’t want to look — so you can make sure it’s accurate. You might find mistakes that, once you clear them up, will boost your credit score.

Once you know where you stand, look for a lender that will offer you fair terms. Wells Fargo and Capital One are often mentioned as good banks to try for bad-credit car loans; or, try an online lender that has a solid reputation and good reviews, like Auto Credit Express.

Bad idea: Financing a car with your bank without shopping around

You trust your bank with your checking account and your IRA, so why not trust it with your car loan? Because the annual percentage rate (APR) varies dramatically from bank to bank. Don’t assume your bank will give you the best deal, or even match the average APR. A quick online check of rates in your area may show a range from 1.99 percent all the way to 7 percent or more.

Better idea: Financing a car with a credit-union car loan

Credit unions are the warmer, fuzzier cousins of banks. Unlike banks, which have to turn a profit for shareholders, credit unions are member-owned cooperatives. You can expect a credit union car loan to offer lower rates than banks, as well as a more forgiving attitude toward short or spotty credit histories.

The only catch is, you have to be a member first. A few credit unions have strange rules — for instance, the Wings Financial Credit Union is only open to members who have worked for the aviation industry, or live in Minneapolis/Saint Paul or Seattle/Tacoma. Most, however, allow you to qualify for membership based on the city where you live or work, the company you work for, or an organization you belong to. You should be able to find one that fits.

Once you’ve gotten the best possible car loan, make sure you get the best deal on car insurance, too. It’s effortless with compare.com.

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Based on a survey of 100 California Residents. Average savings determined via a comparison of their selected policy against their self-reported annual premium.