Evaluating Your Auto Loan, Insurance and Warranty Terms

Purchasing an automobile requires a substantial investment not only in the purchase price of the vehicle itself, but also in terms of paying for the auto loan, insurance, and upkeep. By analyzing the terms of your auto loan, insurance, and warranty, you can keep costs down and help make the most of your investment.

The Loan

There are a few primary factors that you want to consider when evaluating an auto loan: the annual percentage rate (APR), which is what you pay in interest on the unpaid portion of the loan, the period of time over which the loan will be repaid (called the “term”), and penalties or fees associated with the loan. The lower the APR, the less you will pay in interest over the life of the loan. However, unless the interest is fixed, you may find that the APR will increase over time and may affect your ability to pay off a loan that grows to exceed the value of the vehicle. This is especially true if you are drawn to a loan by its introductory rate. Be sure to ascertain how large the rate can grow over the life of the loan before accepting an offer. Also keep in mind that the monthly fee (or “amortization”) may be lower for a loan with a longer term, but the overall cost of the loan will be higher over the life of the loan. Also, penalties such as early repayment fees or financing charges can add high hidden costs to loans with otherwise acceptable terms.

Insurance

According to state laws in all 50 states, drivers must have auto loan insurance that meets basic state standards. These standards are based on Bodily Injury and Personal Property Liability coverage, and some states add Uninsured Motorist coverage to their requirements in case of an accident with an uninsured motorist or a hit-and-run driver. State minimums are not considered substantial enough to fully protect your finances in case of an accident. Experts recommend that drivers carry a minimum 100/300/50 policy (where up to $100,000 will be paid for an individual's injuries, $300,000 for all individuals' injuries combined, and $50,000 for property damage). This is especially important if you have assets to lose in case of a lawsuit.

Personal injury protection (PIP) is only necessary if you do not have good enough medical and disability policies to protect yourself. Although in New Jersey alone can you forgo PIP entirely, you can minimize it in all other states to save costs.

Collision and comprehensive are typically only worthwhile for newer cars that will be worth more than the repair costs. Collision claims will cover the cost of repairs in case of any type of collision (not just with other cars) and comprehensive covers everything else, such as weather damage and theft. While higher deductibles can provide lower premiums, make sure the deductible doesn't exceed what you can afford to pay out-of-pocket, or else the policy will be worthless.

Warranty

If a warranty provides bumper-to-bumper coverage, then it is so comprehensive that it covers all damage and wear to original parts except that listed under “What is Not Covered”. Powertrain coverage provides for damage and wear to the engine, transmission, transfer case, drive axle, and cooling system. Component coverage covers exactly the components listed. Make sure you don't pay extra for a warranty that covers issues already covered by your insurance, and ask about after warranty assistance (AWA); one of the best kept secrets in the industry. AWA can help you pay for repairs after the standard warranty has expired. While eligibility standards vary widely, it is good to know whether this additional safety net is available.


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