FDIC Consumer News - Fall 2017

Preventing an Accident with Your Car Purchase: Tips for Auto Financing

A car is often one of the most expensive things people buy and, like a home, it is generally an essential part of daily life. Since most people use loans or leases (rental contracts that last a few years) to pay for an automobile, FDIC Consumer News offers these suggestions.

Research the different financing options. Car buyers interested in financing have several options, including traditional bank loans. Consumers may also want to consider whether to get a loan from the auto dealership or a lease from the dealership or a leasing company with the option to buy the car at the end of the lease period.

Leases have become more popular recently, in part because they generally have lower monthly payments, but understand that you won't own the car at the end of the lease. Also, know that leases generally come with conditions, including fees if you go over mileage limits or damage the car. If you decide you do want to keep the car at the end of the lease period, you could end up paying more in total than you would have if you bought the car without leasing it first.

Only borrow what you can afford. If you decide to use a loan to finance your car purchase, remember that the loan payment isn't the only expense of buying a car. Other expenses include insurance, gas, maintenance, repairs, and inspection and registration fees. Include these costs when determining how much you can afford to pay each month. Keep in mind that, in the worst case, if you can't make your loan payments your car can be repossessed by the lender.

Shop around and compare multiple offers from different lenders. In general, the following features determine how much you will pay for an auto loan:

• The dollar amount financed. This depends on the price of the car you buy, including "add-ons" like an extended warranty, minus any down payment or trade-in. "The higher the down payment you can comfortably make, the less you will have to borrow, and you may be offered a lower interest rate," said Kathryn Fritzdixon, an FDIC financial economist.
• The Annual Percentage Rate. The APR is a combination of the interest rate as well as certain fees you pay to borrow the money for your car. The APR is comparable across loans, and lenders are required to provide you with the APR for the loans you are considering.
• The term (length) of the loan. Recently, auto lenders have been offering longer-term loans than in the past, some for up to seven years. "A longer term means you may have lower monthly payments, but because you pay interest each month, you will end up paying more overall," said Fritzdixon. "It's best to choose a shorter term as long as the monthly payments stay within your budget." If you're buying a used car, she said to be especially careful about longer-term loans because the car may need to be replaced before you finish paying off the loan.

For more tips on shopping for auto loans and deciding how much you can afford to borrow, see FDIC Consumer News: Considering Buying a New Vehicle? Know This!.