In the not so distant past, you’d have gone down to your local car dealership to buy a car. Now, you're able to shop for a car online in your pajamas. From checking out car models to arranging an auto loan, you can carry out every aspect of buying a car online—everything, except the test drive.
How to Set a Budget for Buying a Car
The worst thing you can do in this case is to buy a car you can't afford, so be very realistic when calculating a budget for buying a car online. You may need to get an auto loan to cover the payments, so take these steps to work out the size of the loan you’ll need.
1. Calculate your regular monthly income and expenses. This will demonstrate how much you can afford to spend on monthly payments for your auto loan. Cautious advice is to not spend more than 15% of your total monthly income on auto loan payments, and it’s even better to limit it to 10%.
2. Gather your down payment. The bigger it is, the less you'll have to borrow and the less you'll end up spending on interest on your loan, so scrape together as big a down payment as possible.
3. Work out the real cost of buying a car. This includes sales tax, registration for your car, purchase fees, and the like. You also need to consider regular costs such as maintenance, car insurance, car repairs, and yearly registration.
4. Trade in. Find out how much you can get for trading in your old car – more about that below.
5. Consider the impact of an auto loan on your current debt burden. It’s generally said that you shouldn’t spend more than 36% of your monthly income on debt, so add your potential auto loan payments onto your current debt payments to see the total.
How to Search for Auto Loan Quotes Online
Next, check your credit score. If your credit score is high, you'll be in a better position to ask for the best rates from lenders. On the other hand, if you discover that your credit standing isn't so great, knowing your score in advance gives you the chance to take steps to improve it before you apply for a loan.
It’s a good idea to try a few different types of lender. Your bank is a good place to start for an auto loan quote, but you need to think outside the box as well, and it’s worth checking out online lenders, such as Clearlane, LendingTree and AutoGravity, because they usually offer better terms and rates.
It’s also worth applying to lenders that specialize in auto loans and ‘captive’ finance companies run by carmakers like Honda Finance and Toyota Financial Services. Since this is their sole focus, they’re likely to offer better loan conditions than all-around lenders.
How to Compare Auto Loans
It can be difficult to compare auto loans that have such varied rates and terms. Sometimes, a loan with a higher interest rate but shorter loan term can cost less overall than one with a lower rate but longer repayment period. Fortunately, there are plenty of online loan calculators that let you enter the details of your loan quote and show you the bottom line in terms of monthly payments or the overall cost of your loan.
Using an auto loan aggregator, such as MyAutoLoan, also makes it easier to compare loan quotes. These sites send you 3 or more auto loan offers from different companies on one application so that you can compare your options within the site.
Make sure to compare the terms and conditions of loans as well as the interest rates. Avoid any loans that come with prepayment penalties, since they force you to pay the full amount of interest on the loan.
Don’t forget to check the loan fees. Hidden application, origination, or loan servicing fees can add hundreds of dollars to the final cost of your loan.
Once you drive away in your new car, you still need to keep on top of your auto loan. To keep on the right side of your loan payments, take these steps:
- Always pay your monthly payments on time. Missing a payment means paying even more in late payment penalties and possibly penalty interest hikes.
- Take advantage of any discounts for using auto pay or paying through a direct debit. Many lenders offer deals for borrowers who set up a regular automatic payment.
- If you can, pay off your loan early. If you’re lucky enough to get a cash windfall, use the money to pay off your loan. Every extra amount that you take off the loan means lower interest payments and a lower loan cost overall.
- If your debt is starting to be too much for you or interest rates have dropped since you took out your loan, refinance it. Auto loan refinancing doesn't need to extend the term of your loan, but it can bring you better interest rates and lower monthly payments.
- Replace your auto loan with a different one. Sometimes, there are much better rates for home equity loans, for example, than for auto loans. Consider taking a home equity loan or personal loan for lower rates and using that to pay off your expensive auto loan.
- Consolidate your loan. If you can't handle your loan payments or you have too many debts at the same time, use one of the many options for consolidating your loans into one single, lower monthly payment.
How to Trade in Your Car Online
If you’re replacing your old car, you should get as much as you can for it. You could try to sell it privately on Craigslist or eBay. You'll probably make more money this way, and you'll get it in cash, but there’s a lot of hassle involved in dealing with all of the time-wasters who ask about your car but don’t make the purchase.
The easiest way is to just trade it in to the same dealers where you’re buying your new car. The dealer will just take the value of your old car off of the purchase price of the new car, and the trade is made. However, you're a lot less likely to get what the car is worth this way.
Another option is to shop around for the used-car dealer that will give you the best price for your car. This way you’ll be guaranteed a sale, but you’ll know that you’re getting a good price for it, too.
Top Online Auto Loan Options
|Carvana||APR from: 3.90%|
|LendingTree||APR from: 2.49%||View Rates|
|Cars Direct||APR from: Varies||View Rates|
Before You Buy
Once your auto loan is in place and you know what type of car you want to buy, you’re almost done. But before you make the deal, remember to take these final steps:
- Take the car for a test drive. It might be a lot less comfortable ‘in real life’ than it seemed online.
- Consider whether you want to pay for an extended warranty on any part of the car. The warranty could save you a lot of money on repairs, or it could be money down the drain.
- Stay alert to last-minute ‘extras’ like car seat covers, unnecessary insurance, and car decals, which could be added to your purchase agreement without you noticing.