Transcription
So if you want to get a car loan without getting totally screwed, then watch this video because I'm gonna teach you exactly how to get a car loan the right way. Financing a car is a big deal because if you don't do it the right way, you're gonna lose a ton of money and you're probably gonna end up going upside down in your car.
Now, I bought my first car when I was 20 years old and I was so stupid because I got a $20,000 loan for seven years at seventeen percent interest. So please don't do what I did because I didn't do any research and I took a really bad advice from my friends on how to grow my credit, and we all know that bad advice will always lead to really stupid decisions.
Now, I'm Jason with the Honest Finance Channel and I make a lot of videos on different financial topics. So if you are interested in this type of content, feel free to subscribe to the channel or at least give this video a like. And now, on to the content that you've been waiting for.
Now, I'll start by saying that financing a car is basically broken into three different parts, but you've got to understand how these different parts work in order to not get screwed. As the consumer, we'll be looking at the amount borrowed, the interest rate, and the length of the loan. Those are the three different parts that you need to understand. These three different numbers will determine what you can or can't afford as a monthly car payment. So pay attention and just remember that a monthly payment doesn't determine what you can actually afford until you apply what I'm talking about.
Now, starting with the amount borrowed, this will be your entire car purchase plus any taxes and fees and any money that's left from a previous car loan. It's basically everything you need to borrow from the bank in order to purchase your car. Now, make sure to do the research on the car that you're buying so that you can get the best deal possible and please don't pay full price for extended warranties or carpet cleaning, anything like that because those prices are all negotiable. Just remember to get the best price possible on your car purchase and feel free and watching my car buying negotiation video if you need help in this area.
Now, as far as the interest rate goes, this is just the amount of money that you have to pay back the bank in order to even have your car loan. Now, in order to get the best interest rates, you've got to have excellent credit or you've got to have a cosigner that has excellent credit in order to make it happen. And if you are using a cosigner, make damn sure that you can make your monthly payments every single month because if you're late just once, you're gonna hurt their credit score and trust me, they're gonna be pretty pissed when they go in to get a loan and they realize that you screwed their credit score.
The bottom line here though is that if you do have bad credit, just stick with the cheap car so that you can actually make the payments and build your credit along the way, or you could pay cash and save up like we used to back in the day. You'll also want to have a down payment of about 10 to 20% to get the best rates. And new cars will typically need about 20% down because of their fast depreciation. I know that 20% down is a lot, but you've got to understand that in order to get the best rates, you got to make a few sacrifices. If you have an existing car that you can sell, just take those profits and use those towards your down payment and you'll probably have enough.
Now, if you don't have very much down, you can at least see what the banks will give you because it's worth a try. The best car loan interest rates are typically about 3 to 5%, which will cost you about $30 to $50 a year per thousand dollars that you borrow. So if you're financing $20,000, then you're gonna be looking at about $600 to $1,000 a year in interest. But that's on optimal credit and with a good down payment. And if you are given a rate that's higher than 5%, then I would highly suggest working on your credit score or paying cash for the car so that you don't go completely upside down on it.
Being upside down in your car means that you owe more than the car is actually worth and that is not a good thing. Cars naturally depreciate on their own, which totally sucks, but it is normal. But just keep in mind that you don't want to be paying a ton in interest because you will go upside down in your car.
Now, when you decide to finance a car, I would stick with just banks and credit unions because they always have the best rates. Just shop around online and I'm sure that you'll find a bank really quick and easy. And please don't go with your local bank just because you know who they are because that doesn't always mean that they're gonna have the best rates. Just always go with whomever has the best terms because that's gonna save you the most money on your car loan.
Now, as an example, I live in Utah and I actually financed a car once through a company called Capital One because they had the best rates and it was easy to just pay online. Dealers can also get you really good rates on car loans, but just make sure that they don't get a cut of the interest rates. And if they're not taking a cut, then go ahead and use them because it's a lot easier and you probably only have to get your credit run once. And sometimes car manufacturers will even offer their own rates, which are typically really good from about 2% to 0% on new car purchases. So if you're looking into a new car and they offer 0% financing and there's nothing funny about it, then that is a seriously good deal.
Now, if you've made it this far into the video, please give it a thumbs up to help me out because it's always much appreciated. Thanks.
And finally, let's cover the length of the loan, which is the amount of time that you're gonna be making monthly payments until the loan is paid off. Just remember this: the longer the length of the loan, the smaller your car payments are going to be. But just remember that the longer the loan is, the more that you're gonna pay in interest. And this is what you have to understand. You have to understand this because banks and dealers will just increase the length of your loan in order to get your payments where you want them so that you think you're getting a good deal. The monthly payment is only important if you're following the three parts that I've been talking about.
Now, the length of the car loan should only be about 24 to 60 months. If you go with anything that's longer than 60 months, you're gonna see the interest rates increase and you're guaranteed to waste way too much money on your car. Typically, the interest rates will go up about one to two points for every year you extend past 60 months, and that's also for the customers with the best credit score. So please don't do anything higher than five years.
So let's say that you buy a car for $15,000 at a 4% interest rate for 60 months. Your monthly payment is gonna be about $300 a month for the next five years, and you're gonna pay almost $1,600 bucks in interest over the life of the loan. Now, let's pretend that we buy the same $15,000 car, but this time you're gonna pay 8% interest over 84 months. Your payments now gonna be $233 a month, which is better than the $276, but this is all a lie because you're gonna pay a ton more in interest. You'll now be paying about $4,600 in interest for the car loan and you'll be paying on it for the next seven years.
So now can you see why having a longer loan is a bad idea? It's all a big fat lie because your monthly payment might look good on paper, but it's actually a total ripoff. And after just a couple years, I guarantee you, you're gonna be upside down in your car and you'll still have five years to go on the loan. Did you know that the average car loan is 68 months long at 4.2% interest for $30,000 borrowed? Those are really scary numbers because it proves that most of us are buying way too much car.
Now, I want to make a quick note here about car insurance. Before you go out and buy a car, please call your car insurance to find out how much the new car is gonna cost you because if you're looking into some fancy 7 Series BMW and it costs you $150 bucks more a month in insurance, then it's probably worth looking into something else. So just call your insurance before you buy a car so that you know how much more it's gonna cost.
And now, after all of this information, you know how to finance a car. Just make sure to get the best price for the car, the best interest rate, and make sure that you're only keeping a loan for 24 to 60 months. And if you follow these three parts correctly, I guarantee you, you're gonna get the best financing possible for your car loan. I'm Jason with the Honest Finance Channel. Feel free to watch any of my other car videos if you're interested in this type of content, or at least give this video a like. That's all.