There are a lot of myths out there when it comes to car loans and i feel like way too many of us
are falling for them including myself and so i just want you guys to be aware that these myths
are not true and that's what this video is going to teach you about now the first myth that i want
to talk about sounds good in theory but it's just not true and this is the fact that the more you
finance the better off your credit score is going to be so for instance if you finance a thousand
dollars it's not as good as if you finance ten thousand dollars as far as your credit score
is concerned now it is true that financing a car can help your credit score assuming that
you always make your payments on time but this is just because of the type of loan that you're using
and it's called an installment loan and all this means is that you make fixed payments until an end
date so meaning like a three-year loan you pay them off for three years and then you're done
that's an installment loan and those will help your credit score but it doesn't matter how much
you're financing so if you finance ten thousand dollars or a thousand as long as you're making
those payments that's what really counts because the first time that i bought a car i was told that
i needed to finance as much as possible to help my credit score out because i was a first-time buyer
now part of this is true i did need to finance the car but i didn't need to finance most of the car
i actually had enough cash to pay off most of it from the beginning but instead i financed most of
it and that's not what i should have done i should have financed 10 percent of the car rather than 90
of the car because at the end of the day that would have saved me a lot of money and interest
and i would have had the exact same thing happen to my credit score which was helping it so just
remember that it's not the amount that you're financing that's going to help your credit score
it's just making those payments on time over a period of time that's going to help your credit
score because that is what they're looking for at the end of the day is someone who's responsible
and can make those payments over a long period of time now the next myth that i want to talk about
is that a lot of people think that you can't refinance your car for at least six months
after you buy it and this is just not true because you can actually refinance your car
tomorrow if you wanted to there is nothing holding you back unless your contract actually states that
but i really doubt it i bet you it's just a salesman because he knows in six months if you
still keep that loan then he probably gets another kickback and that's the only reason he's gonna
tell you to keep the loan for six months unless it's actually stated in the contract so if you
feel like you've got a pretty bad rate on your car loan and that you can get a better one then
i would suggest going to your local credit union and they can actually check your contract and make
sure that everything's okay because they're not going to be able to refinance the loan unless they
pay off that other loan now if you're not really sure if your rate is good or bad then what i would
suggest doing is just find out what your rate is and then compare it to other loans on the market
so just look up your local credit union find their best auto rates and compare it to those rates
so for instance if you have an 11 percent and the lowest rate that they sell is a three percent
and you feel like your credit score is probably good enough to get you something a little bit
better than 11 then i would definitely consider refinancing at that point now the next myth that
i want to talk about when it comes to auto loans and this is the most common myth that i get and
it's just the fact that your payment determines how much you can afford so for instance if you
can only afford a 500 payment then that's all that matters as long as you get a car that's 500
or less per month then you are good to go and this is a total myth because you are going to get
totally screwed over when you buy a car because you're going to finance too much car that you
can't really afford and then you're going to end up going upside down which means that you actually
owe more on the car than what it's worth and that is always going to be a problem because you want
to have equity in the car you don't want to have negative equity because the last thing you want
to have happen is if you go to sell the car and it's actually worth twelve thousand dollars but
you owe eighteen thousand then you're negative six thousand dollars right out the gate on the
next car that you're trying to buy and that's why negative equity is such a problem and that's why
these huge car loans are keeping people in trouble because they're not paying their cars fast enough
as to how much they're actually depreciating at the same time i mean honestly if you give someone
a long enough loan then they're probably going to have a monthly payment that's within reason
and that way they can get into just about any car they want to but the problem is is that the loan
is just too long like what i've been talking about with the depreciation versus how much
you're paying off the car because if you took on a forty thousand dollar loan at a three percent
interest rate which is actually really good and you took it for seven years which is 84 months
then you'd actually end up with a payment of about 528 bucks a month and that might sound
good on paper but you've got a very very big long loan and you are going to be underwater
very quickly now the way that i determine how much car you can afford is actually very simple all you
have to do is make sure that you don't take out a loan for more than 60 months so 60 months at
the most make sure that you put 20 down in your car i know that that sucks and you have to save
up quite a while to get into the car that you want but this is the only way that you're going to be
able to do it without going underwater in the car and then after the 20 you just make sure that your
car payment doesn't exceed 10 of your take-home pay so this is the money that you take home after
taxes as long as it's not over 10 percent then you are good to go now the next myth that i want to
talk about is a little bit more uncommon but some people do think that financing through a dealer
is going to get you the best rate because they can compare rates compared to a lot of different
lenders and that is true but there are some twists here that we need to go over so i'd say that this
myth is actually half true because there's a lot of lenders out there that will compare rates
and they can get you really good rates throughout the entire country so for instance if you found a
three percent rate that was the best you could find locally then some dealers could actually
find you a 2.75 or maybe a 2.5 somewhere else and that's just a win-win because you're going to end
up with the best rate possible and then they help find you that rate which is just a good
customer service thing now the other half of the problem this is where we get into the problem here
is that some dealers out there will have what's called a finance reserve and what this means is
that if you get quoted a six percent rate but that bank in particular was willing to give
you a four and a half percent then that gap that spread of 1.5 percent actually goes back to the
dealer as what they call the finance reserve and they get to keep that rate for themselves
for the entire term that you keep that loan so for instance if they gave you a ten percent rate and
the real rate that you could have got was a five percent then they keep that five percent spread
all to themselves and that is just money that they're making and money that you're losing
now if you really want to go in as prepared as possible i would just get pre-qualified from the
local credit union that way you're already good to go and you already have a fixed rate that's been
established and it's pre-qualified so there's no more headache involved now the next myth that some
people believe is that manufacturer financing is always the way to go and this is not always true
because if you do see zero percent financing for up to 72 months that might be a very good
value but you might also be giving up something else in return and that's where you just have
to do some basic math find out what's in the contract and know for sure if it's a good value
or if it's not most of the time the manufacturer is going to have cash back rebates and then
they're going to have financing offers but usually you can't combine the two so if you take on zero
percent interest for let's say 72 months then you might give up a cash rebate and you just need to
know how much that cash rebate is in comparison to what you're losing as far as financing goes so for
instance if you're gonna finance a twenty thousand dollar car and you could get a three percent rate
or you could actually go with the manufacturer incentive and get zero percent but they're not
going to give you that 3 000 cashback rebate then what you're going to do is just run the different
numbers and find out what's going to be better as far as going with a 3 percent rate and 3 000
or 0 and then obviously you're giving up the three thousand dollar cash back
but all of that is going to change depending on the vehicle that you're buying
how much it costs and then of course what the rebates are what the interest rates are everything
like that that's all going to determine whether or not the manufacturer incentives are actually worth
it or not but that is up to you to do the math and to check what's exactly inside the contract
just to make sure it's good for you now if you guys want to watch more car buying videos i'll
leave some more over here that you guys can watch but thank you for watching if
you just found this channel i'm jason with honest finance and i make a lot of videos on
different topics that'll give your life and your finances more value so feel free to subscribe if
you guys are into that type of content but once again thank you for watching have a great day