You’re considering buying a new set of wheels. But before you set off toward the sunset, there’s a pretty vital step that you must take. You must determine how to afford the vehicle you want to procure. Unless you’re considering paying cash for the entire purchase, the odds are that you will need an auto loan. Auto loans, like the cars themselves, aren’t all one and the same. Interest rates, loan terms, and fees can differ a lot, and securing the wrong loan can prove far more expensive over time. That’s why it’s critical to “shop around” for the best auto loan.
Understand Where You Stand: Your Credit Score
It’s best to know your credit score before you even begin looking at cars or negotiating with lenders. Your credit score is a financial report card of sorts that contains a number that indicates to lenders how responsible you’ve been about borrowing money in the past. The better your credit score, the more likely you are to qualify for lower interest rates, which can save you a bundle over the life of the loan. You’re entitled to a free copy of your credit report once a year from each of the three major credit bureaus. Check it out to verify that everything the report says is all true. If your score is lower than you would like, don’t panic. There are things that you can do to improve it over time, such as paying your bills on time and lowering your debt. Knowing where your score stands gives you a better sense of what type of loan terms you may qualify for, and this enables you to set realistic expectations.
Consider Alternative Types of Loans
Once you know where you stand with your credit score, the next step is to look at the various places that can help you with an auto loan. Some common possibilities you want to think about include:
*Your Local Bank or Credit Union: These are sometimes great places to go first because you probably already have a relationship with them. Banks and credit unions have a range of loan products, and sometimes they provide better rates for their existing customers. You also can often speak to a person if you have questions, which can be tremendously helpful.
*Online lenders: The internet has opened up a whole new world of borrowing. A lot of online lenders offer auto loans. Often, these lenders have streamlined application processes, and you can compare offers from many lenders without leaving your couch. Just do your homework and check that the lender is legitimate before sharing personal information with them.
*Dealership Financing: Same as above, dealerships provide financing. They partner with a variety of lenders and can sometimes secure your loan approval right at the dealership. This can be convenient, but it’s still important to check their offers against ones you discover on your own. Sometimes, dealers may mark up interest rates for extra profit.
Be willing to walk away from your first offer, as it may look good at first. However, you may discover terms you don’t like once you do some digging.
Understand the Loan Terms
Once you receive loan offers, look beyond that monthly payment. You need to understand all the terms of the loan. Here are a few things to look for.
*APR (Annual Percentage Rate): This is the interest rate on a loan expressed as a yearly percentage. A good APR is the key to comparing loan offers. This because you will pay less interest over the life of the loan with a lower APR.
*Loan Term: This is the amount of time you have to repay the loan, typically denoted in months (for example, 36 months, 60 months). While a longer loan term creates lower monthly payments, you pay more interest in total. Shorter loan terms may result in higher monthly payments, but you will pay less total interest. Be smart about what fits into your budget, as this will help long term.
*Fees: Certain loans might have fees, such as origination fees or prepayment penalties. Be sure you understand all the fees involved before agreeing to the loan. Some lenders include prepayment penalties, which will make it expensive to pay off your loan early.
*Down Payment: The more money you put down upfront, the more favorable your loan and interest rate will be. A higher down payment typically means you’ll be borrowing less money, which can translate to a lower interest rate and lower monthly payments.
Compare Offers Carefully
Now that you have a few loan offers, take the time to compare them, and make sure you consider their differences carefully. Instead of focusing solely on the monthly payment, compare the APR, the loan term, and any fees. (There are many loan calculators online you can use to see how much in total interest you’ll pay over the life of each of the loans.) Seeing the impact a small change in interest rate can have over many years can be quite eye-opening.
Don’t Be Afraid to Negotiate
And just as you might negotiate the cost of the car itself, you can try to negotiate the terms of your auto loan, namely the interest rate. If you’ve already got a good-rate loan preapproval from your bank or credit union, use that to leverage the finance department at the dealership. Tell them you have a better offer and ask if they can beat it.
Check for the Fine Print Before Signing
Once you identify an acceptable loan offer, be sure to read all the loan documents carefully before you sign anything. Read everything you are agreeing to, and don’t be afraid to ask questions. This is a huge financial commitment, so you want to make totally sure you know what you’re signing up for.
Comparing loans and trying to narrow down which is the best one can take a bit more time and energy; however, this can save you a lot of money over time. YOU will be rewarded for all your legwork when you drive off in the car you want, and you’ll also have a payment that you can afford.