A Comprehensive Look at CPFB Auto Loans Guide
Why read the CPFB auto loans guide? If you’re looking to buy a new or used vehicle in the near future, you could save yourself hundreds or even thousands of dollars by investing a little time reading the Consumer Financial Protection Bureau’s auto loans guide. Many consumers look for ways to shave dollars off the price of the vehicle, but you potentially can save as much or more money by shopping around for an auto loan, and the CFPB publication gives you step-by-step instructions.
The 5 Sections of the CPFB Auto Loans Guide
In this post, we’ll give you an overview of this useful auto loans guide, then in follow-up posts we’ll dive in a little deeper on their recommendations for preparing your finances and how to shop around for an auto loan. Here’s a quick look at the 5 sections of the auto loans guide:
Section 1: Budgeting for Your Auto Loan
If you don’t have an overall budget, you likely won’t be able to determine how much you can afford for your auto budget. The auto loans guide recommends setting a household budget if you don’t already have one and even provides links to other sources to help you budget.
Then as you decide upon how much you can afford, look beyond the monthly car payment. If you try to stretch your budget by buying more car than you can afford and spread the payments over a longer period of time, you will end up paying more in the long run and risk having a vehicle worth less than what you owe during the payoff period.
You also need to understand there will be ongoing costs, such as gasoline, maintenance, insurance, etc.
Section 2: Understanding Your Auto Financing Choices
While a few consumers pay for their vehicles with cash, the majority finance their purchases. Many consumers will head straight to the dealer for financing, but the auto loans guide recommends shopping around first.
Consumers have the option of three types of financing:
- Auto loans from banks, credit unions or other finance centers give consumers options for better interest rates or better terms. Getting pre-approved for a loan gives you more leverage with the dealer.
- Dealer-arranged financing normally is done through an outside financing company but the dealer handles all of the arrangements and you often can drive off the lot with the vehicle the same day.
- “Buy here pay here” financing options generally carry a higher interest rate but people with poor or no credit might consider it their only option. The auto loans guide offers other advice.
Section 3: Shopping for Your Auto Loan
This is where the guide gets into the truly helpful information about the process of getting an auto loan. The auto loans guide recommends you start by getting your own credit reports so you understand your position as you start shopping. Lenders will consider your credit report and credit score when deciding whether you qualify and then that fees and interest rates they will charge. If you find mistakes in your credit reports, you’ll want to correct them before starting to shop for a loan.
Next, you’ll want to look around at interest rates, determine how much you can afford for a down payment and check into the value of your current vehicle if you plan to trade it in.
Once you are shopping around for loans, if you decide you want to apply at several places to open up your options, you should make all of these applications within a short period of time because applying for loans can affect your credit score, but if you do a group of applications within a short time period, the credit agencies count that as only one application.
Section 4: Negotiating Your Auto Loan
Once you’ve done your homework, you’ll be ready to negotiate your loan. You can negotiate on a variety of items, including interest rates, finance fees, length of loan, down payment, trade-in value of your current automobile and more.
The auto loans guide notes the importance of looking at the greatest overall savings, rather than just basing decisions on the impact on the monthly payment. Consumers enjoy their greatest savings if they can shorten the life of their loan. In an example of a $20,000 loan, the buyer could halve the interest rate paid when shortening the term of the loan from six years to three years while increasing the monthly payment by only about half.
Section 5: Closing the Deal
Before signing on the bottom line, you should receive a disclosure in writing to meet the terms of the Truth in Lending Act. This TILA document will disclose the Annual Percentage Rate (APR), the finance charge, the amount financed and the total of charged. Review all of this information before you sign and make sure it is accurate with the terms you reached in your negotiation. Don’t be afraid to walk away if it doesn’t.
If you finance through the dealer, they often will let you take the vehicle before the loan has been finalized, which is referred to as spot delivery. Make sure you check all the terms when you receive the information from the finance company to ensure it’s what you negotiated.