To make a successful car purchase, you will have to choose the right car, negotiate the price, and, more importantly, fund your purchase in the most economical way. But unless you have a considerable amount of savings to pay for the vehicle in cash, you will probably need to take a loan. A car loan helps you purchase a car that costs more than you can afford with cash. Ideally, you pay off your vehicle over time by paying in installments. But for first-time buyers, navigating the auto loan application process may feel complicated or confusing. In this article, we’ll share a few tips to help you navigate through the auto car application process and find the best car loan.
Set a Budget
Before you apply for a car loan, it’s imperative to evaluate your finances to determine the amount of money you can comfortably borrow. Review your monthly income, living expenses, and other financial obligations. This will help you avoid going beyond your financial capacity and keep the amount of payments at an affordable level in case an unexpected event that can affect your income happens. Your income might increase, or you might get unanticipated expenses in the future. Ideally, your car payment should not spend more than 10% to 15% of your total monthly income on a car loan payment.
Know Your Credit Score
Your credit shows your history of borrowing from other lenders and if you repay loans on time. Lenders use your credit report to determine your eligibility for a loan. Thus, it’s crucial to review your credit reports before applying for a car loan or visiting a dealership because it plays a vital role in determining if you’ll qualify for the loan and at what interest rate. If you have a good credit score, you will get a loan at a lower interest rate. This means that your car will cost less in terms of overall interest costs and monthly installments.
Talk to Different Lenders
It’s crucial to conduct research when looking for the best auto loan. Oftentimes, auto dealerships offer in-house financing, but don’t limit yourself. Explore credit unions, banks, online lenders, and captive lenders. Compare loan terms, fees, and interest rates. This will help you get the best deal for your unique needs.
Choose a Shorter Loan Term
If your budget allows, opting for a shorter loan term offers some benefits. The duration of the car loan term affects the total cost of the loan and your monthly instalments. While shorter contracts normally come with higher monthly payments, they result in less interest paid in the long run. Longer contracts might offer lower monthly payments, but you can end up paying more interest down the road. Financial experts recommend 48 or 60-month loan terms, as they provide more manageable payments with reasonable timelines.
Make a Large Down Payment
A down payment refers to the payment you make upfront when buying your vehicle. You can make a down payment to pay for some of the vehicle’s price and then finance the rest with a loan. Making a large down payment can help you take out a smaller loan, which translates to reduced interest costs and monthly payment obligations for months to come. In addition, it can help you pay off your vehicle sooner to minimize the impact of depreciation. Financial professionals recommend making a down payment of at least 20% of the purchase price to get the most favorable auto loan terms.
Get a Pre-Approval
It’s imperative to get an estimate of what you can afford before you start shopping for your car. Pre-approval is usually a quick, simple process. You give the lender your financial information, including monthly income and existing debt obligations. Based on this information, your lender will provide a quote of how much they’d be willing to lend you. Keep in mind that pre-approval doesn’t mean guaranteed approval for your loan. However, it might help you set a clear budget before meeting a salesperson and negotiate better terms with dealers.
Recognize Sales Techniques That Might Cost You
Dealers have a wide range of additions to sell you once you choose your car. They might convince you to get an extended warranty if you want your car to last longer. Also, they might tell you about special insurance options available to supplement the coverage you already purchased. Although these additions might be beneficial in some situations, they will probably increase the overall car price.
Your loan covers these additional purchases. If an addition really matters to you, you can consider buying it later. Plus, you can take the time to find the most favorable deal because dealerships may inflate their prices. Recognizing these sales techniques can help you avoid unnecessary costs.
Consider Used Vehicles
Used cars are more affordable than new ones. Thus, an auto loan for a used car will probably be more inexpensive than for a new vehicle. Most used cars come with modern features, minimal damage, and reasonable mileage. Buying a used car can help you avoid taking out a costly loan, saving you money in the long term.
Understand the Terms
Before signing an auto loan, carefully read the contract and understand what you agree to. The lender might include additional requirements, like requiring you to pay a penalty if you repay the loan early. Also, be on the lookout for fraudulent car loan contracts. In some cases, fraudsters can claim to have guaranteed approval for a car loan without a credit review, or they’ll offer a better rate and later tell you that you no longer qualify for the rate and charge you high fees. Thus, understand the terms and opt for a lender you can trust.
Conducting in-depth research before shopping around for an auto loan and reading the contract before closing the deal can increase your odds of getting a good deal on a car loan. With the right preparation, you can buy a car that suits your lifestyle without breaking the bank.