If you are buying a new vehicle, it will likely be the most expensive item that you will own aside from your house. That's why it's so important to know the following tips that will ensure you are making the right choice with your vehicle loan.

Make a 20 Percent Down Payment

While you may be offered an auto loan with no money down, this doesn't mean that you should take advantage of it. Ideally, you should be putting down 20 percent of the car's value as a down payment for a few reasons. First, 20 percent is about the max where you stop seeing benefits from a large down payment. Your auto lender will be more likely to give you a better interest rate with 20 percent as a down payment since you are proving that you are good at saving money and have the cash on hand. A large down payment is also going to reduce the amount of the actual loan and lower the amount of interest you pay over the next few years.

Keep the Loan Term Short

There are a lot of variable terms when it comes to how long a car loan is going to last; it could be as short as three years, or as long as eight years in some situations. You'll want to keep the term of the loan as short as possible. Lenders tend to reward borrowers that take on short term loans with a lower interest rate, which will help save you money over the length of the loan by simply paying less interest. Meanwhile, a long term loan will cost you more in interest because you are paying the loan off over a longer period of time and have more interest payments. If you have the same interest rate being offered for a short or long term loan, the shorter term is always going to have less interest over the length of the loan.

Consider the Loan Debt-to-Income Ratio

When you look at the monthly car payment associated with the loan, it is important to look at the loans debt-to-income ratio. This means what percentage of your income each month is going towards your loan. If you make $4,000 per month after taxes and have a $400 car payment each month, that's a 10 percent debt-to-income ratio. This will help put some perspective on how much you are actually paying for your vehicle, since everyone's income level is different. 

For more information about auto loan lending services, contact a local lender.

Share