In our dreams, we may drive Bentleys and Maseratis, but in real life, most of us drive what we can afford. (And for 85 percent of Americans making new car purchases last year, that involved an auto loan.) What is surprising is that buyers will spend countless days researching and negotiating the price of the car itself, but the auto loan will be an afterthought.
Most experts will tell you to pit banks, credit unions and online auto loan companies against one another to come up with the best loan for the car you can afford comfortably. Only then should you step into a dealership to be swayed, cajoled and badgered into buying what the salesperson wants to sell you. While you might stand up to the pressure, having a pre-approved loan is not a bad idea.
Financing the purchase of a car may function a little differently for seniors today if the last time they bought a car, they were still actively earning an income, particularly if they are now on a limited income. Now the funds will either come from their monthly budget, cash reserves or investments.
In any case, a bad purchasing or financing decision can have long-term implications for their retirement planning.Taking out an auto loan is an easy decision if the monthly payments can be absorbed by whatever funds are coming in each month, without major sacrifice.
As for purchasing a car outright, for someone thinking of using cash reserves, that will indeed save the interest cost. However, the savings may not be worth it if that cash is part of an emergency fund that brings peace of mind. As for someone cashing out existing investments, the decision depends on what the investment is yielding, what costs are involved in divesting, and the best interest rate available in an auto loan. Taking out a loan may cost less in the long run.
For the auto loan option, the next step is to evaluate the cost of credit. If seniors have good credit ratings, they might find low-interest loans through their personal bank, a credit union or online auto loan companies. Lastly, some seniors may have cash values accumulated in their whole life insurance policies against which they can borrow at very low rates.
An alternative that could lower the basic purchase price of a car is to buy a pre-owned, recent model car where the initial owner has already absorbed that first-mile-off-the-lot depreciation. The concept is most valuable when the manufacturer certifies the car and offers a substantial warranty on its resale.
Ultimately, while a good amount of ego slips into the decision of what car to buy, the best decisions come down to dollars, good financial judgment and peace of mind.
An unreliable or unsafe car may force a senior into a buying situation, and an auto loan may be the ideal solution. Whether the purchase is planned or forced, an auto loan may be the only way a senior can afford a new or ‘new’ pre-owned car without draining vital cash reserves or cashing out valuable investments at an inconvenient time.
Paying cash for a car may leave a senior dangerously exposed to being unable to pay for any emergency that pops up. Taking out a personal loan could certainly cover such an emergency. However, being in a state of stress is not the best time to be looking for financing.
Also, many seniors carefully monitor the rate and timing at which they take funding out of different savings or taxable investments. There may be important tax implications or penalties related to withdrawing large sums prematurely from tax-sheltered retirement savings such as certain IRAs or cashing out investments when the stock market is in a slump.
Researching and finding the right auto loan means:
- Being able to purchase a safe, reliable vehicle when one is needed;
- Having monthly payments that work within one’s budget;
- Avoiding the need to deplete one’s emergency cash reserves; and
- Not having to cash out investments and savings, including 401ks, at an inconvenient time.
Once we decide we want to take out an auto loan to buy a car, our first consideration is the cost of the monthly payment. We also want to know how easy it is to obtain the loan, where along the loan processing steps we can cancel if we choose and how easy it is to reach the lender’s representatives if we have questions or concerns.
Next, we want details on the company offering the loan and on the loan itself. That includes the maximum and minimum amounts of loans offered, time to obtain the loan, how applying affects our credit, prepayment penalties, payment options, limits, restrictions and loan origination fees.
The best place to begin the car-buying process is to figure out what you can afford, long before you start visiting dealerships, sitting in cars and dreaming. Your budget will tell you what you can afford as an additional monthly payment. If you have saved for a down payment or have a trade-in, that should factor into what you can afford. Entering ‘auto loan calculator’ in your browser will bring up several tools that will give you a rough idea of monthly payments for different loan values.
You also want to obtain a copy of your credit report and credit score from the three major credit reporting agencies (Equifax, Experian and TransUnion), as different lenders may use different reports. By having them all, you have a basis to negotiate more effectively with a lender. However, each credit inquiry lowers your credit score temporarily. Since credit bureaus treat a series of inquiries for one type of loan as a single application if clustered together, it is wise to keep all your auto loan applications within a period of two weeks or less.
If you happen to have diligently paid off all your debts and have not used your credit for some time, you may have to consider a co-signer whose credit is active. This is not a step to be taken lightly as co-signers take on equal responsibility for the repayment of the debt.
Loan composition: The primary factor to compare among auto loans you are considering is the Annual Percentage Rate (APR) of the loan, which adds any extra costs in with the interest rate to give you the real cost of the loan. The Truth in Lending Act requires lenders to disclose information about all charges and fees associated with a loan. The APR makes for an easy side-by-side comparison, with the lowest APR being the best deal when comparing loans of equal duration.
If the monthly payment must fit within a limited budget, altering the duration (or term) of the loan will give you flexibility regarding the size of those payments. Over how many months (36, 48, 60, 72 or 84) will the loan be repaid? The longer the repayment period, the lower the monthly payment. While that may make a loan more affordable, it does increase the total cost of financing. Lenders may also ask higher interest rates for longer loans.
Lender options: If you have decided to take out a loan, your three major lender options are direct lenders, online lenders and dealer financing.
Direct lenders include banks, credit unions or finance companies. You will have to contact these individually and go through the application process with each one. However, the effort is worthwhile. If you get a financing pre-approval before you start car shopping, you will know the terms of your loan in advance, including the maximum amount you can spend. Having this can greatly improve your negotiating leverage with the car dealer.
Online lenders are very convenient, as well as competitive. In some cases, you can apply to individual lenders through online loan applications. In other cases, aggregator auto loan sites will send the information from your application to various lenders, which should result in many offers.
Dealer financing offers the convenience of selecting the car and obtaining the credit in one place. The downside is that once you have selected the vehicle and are emotionally invested, the dealer holds that leverage over you during the financing negotiations. Dealers may have more than one credit source, so they might be able to propose various financing choices. However, dealers are notorious for moving cost items between the price of the vehicle and the cost of the loan, often increasing the total cost of the package.
At times dealers may have manufacturer-sponsored deals in the form of incentives, rebates, special prices or discounts to move certain cars. These might result in excellent terms if you have excellent credit. Be certain to ask specifically about them as the dealer will only mention them if they think they are losing your sale.
Closing the deal: Your best strategy is to enter the dealership stating that you have your financing lined up and simply want to negotiate the best price for the car. This helps against the salesperson’s attempt to commingle the price with their financing terms. By keeping the two elements separate, once you have the price locked in, you can then ask about their financing and compare it with the pre-approved loan you have with a direct or online lender.
In any case, confirm that all terms are fully agreed and final before you sign the contract, turn over your trade-in car and drive off the lot with the new car. Your auto insurance will also have to be in place. There are many moving parts at the closing of a car purchase; do not allow yourself to be pressured into anything that makes you uncomfortable.
Two areas differentiate what seniors prioritize compared with younger people when taking out auto loans: age-friendliness and health-related value.
Age friendliness: As long as you are comfortable enough going online to research auto loans, your age should not affect your interaction with a potential online lender. (Offline lenders will likely require face-to-face conversations.) However, depending on your age you may want to think about the repayment timetable, not making it so long that you risk leaving an unpaid loan to your heirs.
By selecting a long repayment period, it will also take longer before you start building equity in the car because monthly payments are smaller.Ideally, you want to get to breakeven, and beyond (where the car is worth more than what you owe on it) in case you want to trade it in or sell it. You do not want to find yourself ‘upside down’ where it is going to cost you – or an heir – money to divest of the car because you owe more than it is worth. You also do not want to find your insurance company pays less than what you owe, in case the car is stolen or totaled.
Health-related value: Your health does not factor into the application for an auto loan. Even if you become too ill to drive, you may have a caretaker or family member who drives you as needed. However, the debt does not disappear if you die during the repayment period. It becomes part of your estate. While lenders cannot discriminate based on age, they do require that you have a valid drivers license to finance a car. Therefore, if for reasons of eyesight or health you cannot get a drivers license in states with restrictions, you cannot get a loan.
Your first negotiation will be over the price of the car itself, which should be done separately from the financing. To keep control of the negotiation, this should be discussed as a dollar figure for the car, not as the monthly payment you can afford.
Regarding the price of the car, you have three sets of fees to deal with: unavoidable closing fees, possible dealership fees and avoidable dealership fees.
Unavoidable closing fees include state sales tax, title and registration costs required to register the car with the state, a documentation fee to the dealer for that service and a one-time destination charge to transport the vehicle from factory to dealership.
Possible dealership fees include any extended warranty you decide to purchase, regional dealer advertising fees and additional dealer markup. You may try to contest the last two but may not be able to get around them.
Avoidable dealership fees include credit life insurance or disability insurance (to pay off the loan if you die or are disabled) and a dealer preparation fee (which manufacturers have already paid the dealer to do). Several add-ons are unnecessary today, such as rustproofing, undercoating, paint sealant and fabric protection. Other add-ons, such as pinstriping, VIN window-etching and anti-theft systems can be purchased for less elsewhere, should you want them.
As for the auto loan itself, the lender is likely to charge origination (or acquisition) fees up front for providing the loan. It is considered the lender’s processing commission, in addition to the interest collected.The Truth in Lending Act requires lenders to disclose details on a loan agreement that include the amount of the loan, the APR, finance charges (including application fees, prepayment penalties and late charges), a payment schedule and the total amount that will be repaid over the life of the loan.
In most financial transactions, seniors are seeking ‘ease’ in all aspects. Auto loans are no different. First, you want to know what the monthly payment will be.Then you want to know how easy the loan is to obtain, how and when it can still be canceled if necessary, and how supportive the lender’s customer support team will be.
Cost: The cost of the loan is represented by the monthly payment that is determined by the face value, the APR (Annual Percentage Rate) and the term of the loan. Any origination or other fees will be wrapped into the APR but disclosed in accordance with the Truth in Lending Act. If you are using online resources to pre-qualify for loans, you should obtain all the information you need to make side-by-side comparisons of at least two or three options. Those can then be compared with loans from direct lenders and dealerships before a final decision is made.
Ease: The formal loan application process should be quick and easy, regardless what type of lender it is. Online lenders will offer greater ease, especially aggregators who send your application information to multiple lenders. Direct lenders and dealers require face-to-face visits.Payment options should also be easy, including mobile apps, direct deduction from an account, by debit card and more.
Cancellation: An auto loan is a contractual obligation, taken on willingly. As it does not use your home as security, it does not automatically benefit from the 3-day cool-down period you would have otherwise under the Truth in Lending Act. Unless stated otherwise in the contract’s fine print, once the contract is signed and the loan issued, the only way to cancel a loan is to repay it.
Customer support: Access to auto loans online has made the process simpler, including being able to complete the entire application process on a lender’s website, for example. Despite the simplicity, this is a serious financial commitment. Therefore, a lender’s customer support team should be available during extended business hours by phone, by email and online to answer any questions or discomforts you have.
After exploring car manufacturers’ websites to discover the cost of vehicles – and then visiting lenders’ sites to calculate monthly costs – you may decide the cost of buying a particular car is too high.One option may be to lower payments by leasing the same car: upfront costs and monthly payments are usually lower, and the car is under factory warranty, so surprises are fewer. However, keep in mind that you will not own anything at the end of the lease; you will have paid to drive the car for the period of the lease.
Seniors’ driving needs may change more frequently than someone younger’s, so being able to lease a new car every three years (the typical lease period) may be preferred to the standard 5-year car loan. (To shorten the car loan to three years would make the monthly payments even less affordable.)
The costs involved in leasing go by different names and seem more complex than those related to auto loans. Many costs can be negotiated, including the initial valuation of the car and its residual value at lease’s end, and both factor heavily in calculating the car lease payment. Most leases presume an annual mileage allowance of 10,000 to 15,000 miles. If you drive more than this, excess mileage charges could quickly escalate the total cost of the lease.
Because you do not own the car, as the lessee you are responsible for any missing equipment in the car, plus damage or excess wear and tear. You must meet the leasing company’s standards in terms of insurance coverage as well as maintenance. If for any reason you need to terminate the lease early, substantial penalties will be charged.