How do car loans work?

lifeonthehill · January 2015

Our little focus is on it's last legs. Its like I can feel it dying under my feet. We are going to wait till there is some issue but we aren't interested in paying to fix anything major. We are on track to be able to buy a new car in cash in November! But the unexpected does happen. H and I talked about it today and he said he would prefer to to use whatever we have saved and take a loan for the rest. We don't want to touch the E-Fund since we will be TTC in June.

But now I am faced with the question of how the buying process without cash works. I have only ever bought cars with cash and same for H.

Anybody care to explain?

ETA: We would go through our credit union.

Sisugal · January 2015

Before you set foot on the car lot - check with your local credit union (usually the best rates) for what they are offering for new and used car rates - NO LONGER THAN A 3 YEAR LOAN!! (yes, they offer them all the way up to 7 years - but that is crazy) This way you know if the dealership is offering a better finance deal or the credit union is offering the best finance deal --- you have no obligation to finance thru the car dealership.

Decide how much you want to pay monthly - and then use a reverse online calculator to determine how much of a loan you are comfortable with. IF you cannot afford a 3 year payment amount - you are buying too much car for your budget.

Until you really NEED to buy a car - keep saving and also research what kind of vehicle you would want.

Decide on a car - negotiate the price - then you get a cashier's check made out to the dealership for the cash amount and a loan from the credit union or dealership for the balance.

Congratulations on the great job with your finances!

Sisugal · January 2015

Negotiate the price of the car first - often the salesperson will start by asking "What kind of payment amount are you looking for" and that gives him an idea how much car he will show you -but, but -he will stretch the monthly payments out for a L-O-N-G time to make the payment fit. Know what you want before and have a price point in mind before you get to the lot!

lifeonthehill · January 2015

Sisugal said:

Before you set foot on the car lot - check with your local credit union (usually the best rates) for what they are offering for new and used car rates - NO LONGER THAN A 3 YEAR LOAN!! (yes, they offer them all the way up to 7 years - but that is crazy) This way you know if the dealership is offering a better finance deal or the credit union is offering the best finance deal --- you have no obligation to finance thru the car dealership.

Decide how much you want to pay monthly - and then use a reverse online calculator to determine how much of a loan you are comfortable with. IF you cannot afford a 3 year payment amount - you are buying too much car for your budget.

Until you really NEED to buy a car - keep saving and also research what kind of vehicle you would want.

Decide on a car - negotiate the price - then you get a cashier's check made out to the dealership for the cash amount and a loan from the credit union or dealership for the balance.

Congratulations on the great job with your finances!

Thanks for the basic rundown!

I know about the 7 year loan nonsense. My mom is on one. UGH.

We want another Ford Focus. It has served us well for 8 years and the price for a two year old one averages $12,500 which works for us.

vlagrl29 · January 2015

I have a ford focus too! 11 year old red, 2 door, hatchback and I will probably get another one as well when the time comes. I haven't had any major issues with mine yet - knock on wood. I got mine from the dealership way back when they were offering 0% financing and paid it off that way. My loan was from Ford I believe. I was 23 at the time. Now when I have to get another car it will be gently used and I will most likely get the loan thru our credit union that we bank at.

lifeonthehill · January 2015

vlagrl29 said:

I have a ford focus too! 11 year old red, 2 door, hatchback and I will probably get another one as well when the time comes. I haven't had any major issues with mine yet - knock on wood. I got mine from the dealership way back when they were offering 0% financing and paid it off that way. My loan was from Ford I believe. I was 23 at the time. Now when I have to get another car it will be gently used and I will most likely get the loan thru our credit union that we bank at.

I love mine! I will be in tears when I have to get rid of it. It is a 2007 and I got it in my junior year of high school. I wasn't very kind to it in my younger years.

Knowing yours is 11 years old gives me hope that mine may make it till November after all!

hoffse · January 2015

Agree with the others to check a local credit union. Our car loan is through PenFed with 0.99% financing for a 3-year term. Right now they have the same 3-year term for 1.49% or 0.99% if you use their car-buying service (which ought to work the same way as Costco's does... they just refer you to a dealer).

IIRC to join PenFed you deposit $5 into an account with them, and then you are a member. Check me on that though, because I joined years ago:

https://www.penfed.org/New-Auto-Loan/

When we got our loan from PenFed, we simply asked them to cut us a check for $X dollars. We had the check a week later and took it to the dealership, then paid the difference out of our personal account. If your lender does a similar thing, and you haven't cut a deal with a dealer before you have the check in hand, then I would ask for more than you are likely to need from your lender just so you have the cash in hand. You can always turn around and pay it off immediately with your savings, but that way you don't get stuck at the dealership with not quite enough.

Something else to keep in mind is the difference between the base cost of the car and the out the door cost. You're likely to pay what feels like significantly more than the base price due to things like destination fees and state taxes. Check your state tax rate for car purchases before you buy so you don't have a minor heart attack when they give you the final amount. Dealers also do things like add pinstripes, etc. to the cars on the lot and then charge you for it. In the past, we have asked these things to be removed. If they can't be removed (ie: nitrogen-filled tires), then we simply tell the dealer we won't pay for it, and we won't buy the car if they don't remove those charges. They almost ALWAYS agree if you stay firm.

Also keep in mind that the "invoice" price is actually more than what dealers pay for most cars. They typically have a 3% holdback that's below invoice. I would be negotiating to get it as close to invoice (or even lower) as possible.

Finally, if you can hold out a bit longer... usually the best deals are at the end of the month and the VERY best deals are in the last few days of December. Many states tax dealerships based on the number of cars they have on their lot as of the last day of the year (or the first day of the new year), and dealers are incentivized to clear their lot before then. Also keep your ear to the ground for dealer incentives on the Focus. There will probably be a handful of those that pop up throughout the year. Usually these incentives mean that dealers get some extra cut from Ford (or whoever) to sell that type of car by x date. Many dealers will pass those savings onto you, and you can get a lower base price for the car that way.

formerlyGDaisy09 · January 2015

Definitely go into it with a price point in mind, they do love to focus on the monthly payment. Most dealers can offer the best interest rates on new cars, so keep that in mind when you're weighing pre-owned versus new (you can get much more car for the same price going with a 2-3 year old pre-owned). Though I bet you guys have pretty good credit and could get a good rate on whatever you choose.

H and I tend to go with the longer term loans (generally 5 years) knowing that we are capable of paying the loan off much much sooner...the longer-term just keeps our month-to-month obligations lower if something happens. Currently our interest rate on our car loan is much lower than the interest rates on our student loans (0.99%) so we actually make minimum payments right now so more money is focused on our student loans (with interest rates closer to 6%).

There is something to be said about buying a car before your current car fails you...H and I waited until his car was in a place where it needed repairs we weren't willing to make and ended-up at the mercy of the dealer (love the car we got out of it...though the loan is not ideal). basically we needed to trade his car in, (he got a lemon...it was a 2009 that we were making $200/month payments on and was needing $400-600 repairs every 6-8 weeks) we decided on a car we were going to buy, (5 year loan at 0.99%), the dealer's wife had actually been driving the car we were buying...and she got into an accident the day before we were suppose to pick the car up (bringing the car back to the dealer for us)...but H's car wasn't going to pass inspection...we didn't want to wait for repairs, nor did we really want a car that had been in an accident. anyways the dealer worked with us, we ended-up with a year newer car with 40K fewer miles on it... they knocked a couple thousand off the price of the car...but ended up stretching the length of the loan out to keep our payments down (our minimum payment is actually $80 lower than it would have been on the 5 year loan on the other car). we'll still be able to pay it off in less than 5 years....but it's a good warning about ending up in a position where you're really needing to walk away from the dealership with a new-to-you vehicle.

mana8503 · January 2015

Gdaisy09 said:

H and I tend to go with the longer term loans (generally 5 years) knowing that we are capable of paying the loan off much much sooner...the longer-term just keeps our month-to-month obligations lower if something happens.

This. We're car shopping now, and I don't mind getting 5 year loan knowing we'll pay it off way sooner. But if H has a rough month at work, our obligation is lower and we can pick back up the next month. I especially don't mind when it's 0%. If it was more, it usually goes up a few points the longer the loan is for.

vlagrl29 · January 2015

alyssa32713 said:

vlagrl29 said:

I have a ford focus too! 11 year old red, 2 door, hatchback and I will probably get another one as well when the time comes. I haven't had any major issues with mine yet - knock on wood. I got mine from the dealership way back when they were offering 0% financing and paid it off that way. My loan was from Ford I believe. I was 23 at the time. Now when I have to get another car it will be gently used and I will most likely get the loan thru our credit union that we bank at.

I love mine! I will be in tears when I have to get rid of it. It is a 2007 and I got it in my junior year of high school. I wasn't very kind to it in my younger years.

Knowing yours is 11 years old gives me hope that mine may make it till November after all!

Mine has always been my baby. First car I have ever bought and I've taken really great care of it. You can't tell its 11 years old. My parents gave me their tempo when I got my license and that car died on the highway twice at 11 years old so getting a new car was kinda of must and I had to take a loan out on it. Next time I will get a 4 door hatchback (love the hatchback because of all the music stuff I haul with me). People think 2 door cars are a pain with kids, but we only have 1 kid and it's actually pretty easy and better than a car payment. We will eventually have 2 kids and a 4 door will be better at that time.

The most expensive think I've ever had done on it was repairing part of the air conditioner - everything else has pretty much been maintenance related like replacing break pad, tires, etc.

brij2006 · January 2015

I'm just coming in to be the little angel on your shoulder and say "you've worked this hard to be debt free, don't go back into debt!!!!"

Okay, so I'm going to go preachy. But when this car poops out entirely (and not just a $1k fix that would get you by for another year till you're fully ready to buy the car in November), buy as much vehicle you can with the cash that you already have saved. Then continue to save up, sell that car, then buy the $12k car when you have the cash to do so.

Trust me, you will thank yourself later for that.

ETA: I do agree to not use your Efund toward this though.

formerlyGDaisy09 · January 2015

mana8503 said:

Gdaisy09 said:

H and I tend to go with the longer term loans (generally 5 years) knowing that we are capable of paying the loan off much much sooner...the longer-term just keeps our month-to-month obligations lower if something happens.

This. We're car shopping now, and I don't mind getting 5 year loan knowing we'll pay it off way sooner. But if H has a rough month at work, our obligation is lower and we can pick back up the next month. I especially don't mind when it's 0%. If it was more, it usually goes up a few points the longer the loan is for.

Yes! My H's income also fluctuates month-to-month so minimizing what we owe is huge! once we pay cars off we drive them until they aren't worth fixing (and put a portion of the min-payment into savings for fixes and the next DP) that way we're still in the habit of having that car-payment line item in the budget!

lifeonthehill · January 2015

Gdaisy09 said:

Definitely go into it with a price point in mind, they do love to focus on the monthly payment. Most dealers can offer the best interest rates on new cars, so keep that in mind when you're weighing pre-owned versus new (you can get much more car for the same price going with a 2-3 year old pre-owned). Though I bet you guys have pretty good credit and could get a good rate on whatever you choose.

H and I tend to go with the longer term loans (generally 5 years) knowing that we are capable of paying the loan off much much sooner...the longer-term just keeps our month-to-month obligations lower if something happens. Currently our interest rate on our car loan is much lower than the interest rates on our student loans (0.99%) so we actually make minimum payments right now so more money is focused on our student loans (with interest rates closer to 6%).

There is something to be said about buying a car before your current car fails you...H and I waited until his car was in a place where it needed repairs we weren't willing to make and ended-up at the mercy of the dealer (love the car we got out of it...though the loan is not ideal). basically we needed to trade his car in, (he got a lemon...it was a 2009 that we were making $200/month payments on and was needing $400-600 repairs every 6-8 weeks) we decided on a car we were going to buy, (5 year loan at 0.99%), the dealer's wife had actually been driving the car we were buying...and she got into an accident the day before we were suppose to pick the car up (bringing the car back to the dealer for us)...but H's car wasn't going to pass inspection...we didn't want to wait for repairs, nor did we really want a car that had been in an accident. anyways the dealer worked with us, we ended-up with a year newer car with 40K fewer miles on it... they knocked a couple thousand off the price of the car...but ended up stretching the length of the loan out to keep our payments down (our minimum payment is actually $80 lower than it would have been on the 5 year loan on the other car). we'll still be able to pay it off in less than 5 years....but it's a good warning about ending up in a position where you're really needing to walk away from the dealership with a new-to-you vehicle.

That story scares me. Our car has been fine really but I just know it is getting old and it scares me. I think more than anything I am just getting nervous.

vlagrl29 · January 2015

I think it can be dangerous to your family to drive a car that definitely needs to be replaced. When my tempo died for the 2nd time on the highway I was done with it. Plus it was cost 1k every time to get looked at. When the repairs add up to be more or the same as a car payment per month, then it's time to really get a new car.

Don't touch your e fund, you can use the cash you have saved right now and finance the remaining amount if you want. It's really not a big deal to finance knowing you will pay it off as fast as possible because that's what you do. We don't pay cash for cars and probably never will.

I sold my tempo for around $1500 which ended up paying the taxes off on the new car I purchased. Personally I would sell your car before it has more issues. There are people out there willing to put money into a car, especially for their teenagers.

lifeonthehill · January 2015

brij2006 said:

I'm just coming in to be the little angel on your shoulder and say "you've worked this hard to be debt free, don't go back into debt!!!!"

Okay, so I'm going to go preachy. But when this car poops out entirely (and not just a $1k fix that would get you by for another year till you're fully ready to buy the car in November), buy as much vehicle you can with the cash that you already have saved. Then continue to save up, sell that car, then buy the $12k car when you have the cash to do so.

Trust me, you will thank yourself later for that.

ETA: I do agree to not use your Efund toward this though.

I agree. But with a possible baby in the picture H would NEVER go for a beater car. He refuses to put a baby in the car we have now so we are absolutely going to need a new to us car before then.

This is one of those heavy compromise situations just like having a 2 year e-fund instead of 1 year like I wanted. I don't think he is being unreasonable wanting a new to us car. This isn't the hill I want to die on.

vlagrl29 · January 2015

alyssa32713 said:

brij2006 said:

I'm just coming in to be the little angel on your shoulder and say "you've worked this hard to be debt free, don't go back into debt!!!!"

Okay, so I'm going to go preachy. But when this car poops out entirely (and not just a $1k fix that would get you by for another year till you're fully ready to buy the car in November), buy as much vehicle you can with the cash that you already have saved. Then continue to save up, sell that car, then buy the $12k car when you have the cash to do so.

Trust me, you will thank yourself later for that.

ETA: I do agree to not use your Efund toward this though.

I agree. But with a possible baby in the picture H would NEVER go for a beater car. He refuses to put a baby in the car we have now so we are absolutely going to need a new to us car before then.
This is one of those heavy compromise situations just like having a 2 year e-fund instead of 1 year like I wanted. I don't think he is being unreasonable wanting a new to us car. This isn't the hill I want to die on.

I agree with your H especially with a baby in the future.

lifeonthehill · January 2015

vlagrl29 said:

alyssa32713 said:

brij2006 said:

I'm just coming in to be the little angel on your shoulder and say "you've worked this hard to be debt free, don't go back into debt!!!!"

Okay, so I'm going to go preachy. But when this car poops out entirely (and not just a $1k fix that would get you by for another year till you're fully ready to buy the car in November), buy as much vehicle you can with the cash that you already have saved. Then continue to save up, sell that car, then buy the $12k car when you have the cash to do so.

Trust me, you will thank yourself later for that.

ETA: I do agree to not use your Efund toward this though.

I agree. But with a possible baby in the picture H would NEVER go for a beater car. He refuses to put a baby in the car we have now so we are absolutely going to need a new to us car before then.
This is one of those heavy compromise situations just like having a 2 year e-fund instead of 1 year like I wanted. I don't think he is being unreasonable wanting a new to us car. This isn't the hill I want to die on.

I agree with your H especially with a baby in the future.

Exactly. I am not even sure how I would fight him on this one. Haha

brij2006 · January 2015

I know that I'm crazy MM, but there are safe vehicles out there (yes safe enough for a child to be in) that don't break the bank. There are options that don't require a loan. We got rid of a 2011 vehicle with a loan, for a 2004 vehicle we paid $3k cash for. All while being pregnant and knowing that we will be having a little one riding in it. It still have side curtain airbags and amazing safety ratings (actually better than the 2011). So to say that a loan = safety, it does not.

However, if you know for a fact that you will be buying the vehicle you were going to pay cash for in November, much earlier with a loan instead of cash. Then what's to stop you from putting down however much you have saved up at that point (let's say yours poops out 2 months from now), then continuing to pay the loan off at the same rate you were planning to save up to buy in cash in November? It will put you in the same place you originally would have been (except a bit of interest), and then you don't have to worry about the loan term. If your bank offers .9% on 24 month car loans, then take that, pay the amount on it you were originally going to be saving each month for a newer vehicle, and have it paid off in the same timeline you were originally planning to pay in cash.

formerlyGDaisy09 · January 2015

alyssa32713 said:

vlagrl29 said:

alyssa32713 said:

brij2006 said:

I'm just coming in to be the little angel on your shoulder and say "you've worked this hard to be debt free, don't go back into debt!!!!"

Okay, so I'm going to go preachy. But when this car poops out entirely (and not just a $1k fix that would get you by for another year till you're fully ready to buy the car in November), buy as much vehicle you can with the cash that you already have saved. Then continue to save up, sell that car, then buy the $12k car when you have the cash to do so.

Trust me, you will thank yourself later for that.

ETA: I do agree to not use your Efund toward this though.

I agree. But with a possible baby in the picture H would NEVER go for a beater car. He refuses to put a baby in the car we have now so we are absolutely going to need a new to us car before then.
This is one of those heavy compromise situations just like having a 2 year e-fund instead of 1 year like I wanted. I don't think he is being unreasonable wanting a new to us car. This isn't the hill I want to die on.

I agree with your H especially with a baby in the future.

Exactly. I am not even sure how I would fight him on this one. Haha

I agree too. Honestly interest rates on cars are generally so low (lower than a mortgage or student loans) that even if you don't pay the car off early, in the grand scheme of things you really aren't paying THAT much more in interest than if you bought the car with cash, especially if it means getting a car you're going to be happy with long term (the time you spend looking for cars and trying to sell cars is worth something).

Plus, like my story above, there is some power in being able to go to a dealership, see what kind of deals they're offering, and to have the power to walk away and say "I think we'll wait a month or a few weeks before trading in our current car"

Xstatic3333 · January 2015

@alyssa32713, you guys are saving machines. PPs have given great advice, but if I was a betting woman I'd bet you end up with the Focus you want, paid in cash.

lifeonthehill · January 2015

brij2006 said:

I know that I'm crazy MM, but there are safe vehicles out there (yes safe enough for a child to be in) that don't break the bank. There are options that don't require a loan. We got rid of a 2011 vehicle with a loan, for a 2004 vehicle we paid $3k cash for. All while being pregnant and knowing that we will be having a little one riding in it. It still have side curtain airbags and amazing safety ratings (actually better than the 2011). So to say that a loan = safety, it does not.

However, if you know for a fact that you will be buying the vehicle you were going to pay cash for in November, much earlier with a loan instead of cash. Then what's to stop you from putting down however much you have saved up at that point (let's say yours poops out 2 months from now), then continuing to pay the loan off at the same rate you were planning to save up to buy in cash in November? It will put you in the same place you originally would have been (except a bit of interest), and then you don't have to worry about the loan term. If your bank offers .9% on 24 month car loans, then take that, pay the amount on it you were originally going to be saving each month for a newer vehicle, and have it paid off in the same timeline you were originally planning to pay in cash.

That was 100% the plan. If we have to take out a loan I am not going to have it floating over my head any longer than it absolutely has to be.

lifeonthehill · January 2015

Xstatic3333 said:

@alyssa32713, you guys are saving machines. PPs have given great advice, but if I was a betting woman I'd bet you end up with the Focus you want, paid in cash.

Hahaha. Thanks! We are really lucky to be in the situation we are in and we are trying to take advantage of it.

vlagrl29 · January 2015

alyssa32713 said:

Xstatic3333 said:

@alyssa32713, you guys are saving machines. PPs have given great advice, but if I was a betting woman I'd bet you end up with the Focus you want, paid in cash.

Hahaha. Thanks! We are really lucky to be in the situation we are in and we are trying to take advantage of it.

you totally should! It won't always be like that

lifeonthehill · January 2015

vlagrl29 said:

alyssa32713 said:

Xstatic3333 said:

@alyssa32713, you guys are saving machines. PPs have given great advice, but if I was a betting woman I'd bet you end up with the Focus you want, paid in cash.

Hahaha. Thanks! We are really lucky to be in the situation we are in and we are trying to take advantage of it.

you totally should! It won't always be like that

Well hopefully we will always manage to live on campus so at least housing will be paid for!

We are trying to prepare for the hit of my leaving my job to SAH that will eliminate more than more than half of our savable income.

How do car loans work?

Re: How do car loans work?

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