An SUV is far from an investment. Investments offer the promise of returning profit whereas with an SUV, from the moment you drive it off the lot it depreciates quickly. Often compounding matters is when you finance your model, you make common mistakes. These mistakes result in your loan being more expensive, which, when coupled with the rapidly declining value of your SUV, end in the loan being far more expensive than the vehicle is worth.
To reduce the likelihood of this occurring, here are the common mistakes made when doing a loan for an SUV, and ways you can avoid them.
Failing to Account for the Payment in Your Budget
Adding a vehicle loan to your budget can be a big expense. Therefore, it’s vital you account for this expense to ensure you can afford it. An effective way to do this is to see how much your SUV cost--you can use a service like TrueCar to help you determine the average price others in your area pay for the same model. Next, use a car loan calculator to estimate what your payments will be. Once you come up with an estimated payment amount, for two to three months do a transfer from your checking to your savings account and treat that as your SUV payment. After doing this for that time go back through to see how it affected your finances. Did you pay all your bills on time? Were you still saving money? If you answered yes to both of these questions, then you are ready. However, if this transfer tightened your finances, it’s important to reassess, here are a few ways to do this:
- First, you should ask if you can afford a vehicle loan. If you are struggling to make payments on time and save money, another bill is the last thing you need.
- Moreover, you should also consider the SUV you are interested in buying. Are there more affordable alternatives available?
- If you were considering buying new, maybe think of a pre-owned model instead. You can find a certified SUV that comes with a warranty and service benefits for less than you would pay for a new model.
Failing to Check Your Credit
When financing your SUV, lenders check your credit to see your ability to repay the loan. With this in mind, you want to put your best foot forward. To do, check your credit histories beforehand, understand your limitations as it concerns what happened in the past, and be realistic on what kind of loan you might earn approval on.
Just as important is to verify all the information in your credit report is correct. Errors persist all the time and if left unexamined, can lower your score. This could be the difference between you receiving a loan with a good interest rate or a subprime loan where your payments will be much higher.
Failing to Make a Down Payment
SUVs depreciate in value the more you drive them. Therefore, when you drive a new SUV off the lot it reduces its value substantially. Because of this consideration, it’s important to make a down payment to mitigate the decrease in value. You should aim for at least 20 percent of the SUV’s price and also pay for tax and other fees that might apply. By taking this approach, you stay close to even with the loan to value ratio that way if you want to trade the vehicle in later on for a new SUV, you can do so without fear of being upside down in the loan.
Upside down happens when your SUV is worth much less than the loan. To demonstrate, say the value of your SUV is $16,000, but your loan balance is $21,000. If you wanted to trade in your current model, you would need to bring $5,000 to close out the loan, or roll that $5,000 in negative equity into the new loan. The latter option should be a last case resort as it will make your new loan much more expensive with the additional $5,000.
Using the Dealer for Financing
Financing at a dealership is easy, but it’s rarely the most affordable option. It’s true some dealers will work hard to secure you the best rate, however; unless your credit is stellar--think 720 and above--you won’t qualify for the best dealer or manufacturer incentives. Besides, all the dealers are doing is checking with different banks and credit unions in their network to see who will approve you when you can do the same thing and place the power back in your hands.
It’s wise to do research on your end to know where you stand with lenders. You can achieve this by applying with multiple lenders to see which kind of rates you qualify for. Once you find the loan with the most competitive interest rate you can visit your dealership to see how the rates you found correspond with theirs. Next, you can choose the terms which are most beneficial to you.
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Other Factors Influencing Cost
As you consider financing a newer SUV, it’s important to keep these factors in mind:
- Your insurance costs will likely change. To avoid any surprises in bills, be sure you do a quote on the newer SUV you are considering, as this will give you an idea of what your new insurance premium will be.
- You can use a resource like Kelley Blue Book’s 5-Year Cost to Own to see how much you pay for repairs, maintenance expenses, state fees and more. It’s important to factor these into your budget as well. To do this, take the average repair cost for five years and divide that number by 60. Each month save that money to account for future repair expenses.
Lastly, sleep on your decision. Dealerships won’t like it but giving you more time to think on the purchase provides clarity as to whether it’s the right move at the right time.
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