Taking out a car loan whether for a new or used car is a major decision that goes beyond your monthly payment. Before taking out a new auto loan, make sure you know the following.
You Are Not Only Shopping for Car But Also for Financing
It is easy to focus mainly on the car that you want to buy, but in reality, you are shopping not just for the vehicle, but for financing to pay for it.
Get Pre-Approved Before Shopping for a Car
Make sure that your car loan is pre-approved before you shop for a car. This ensures your loan will cover the purchase of the car, and it also gives you leverage. Before looking for a car, compare rates among lenders including credit unions and banks before your dealership to find out the loan with the best terms.
Your Credit Score Determines Your Loan
One of the factors that affect how much a car loan will cost is your credit score. Banks and dealerships usually offer low-interest rates to those who have the best credit score. Financing options are only available to qualified individuals who meet the bank’s or dealership’s minimum credit score rating requirements. Before you apply for a car loan, make sure that you have a healthy credit score by paying down your debts.
Go for The Shortest Term Possible
It may be tempting to go for a loan offering low monthly payments on their longer terms such as six years, but in reality, it is not that cost-effective. Longer-term financing can get you to pay thousands more for your loan amount compared to short-term loans because of interest. The best term to go for is the shortest term you can afford.
Your Down Payment and Interest Rate
The bigger your downpayment for your car’s total purchase price, the less the amount of loan you need to borrow. This can be useful if you have a bad credit score, because when you make a large down payment, you may not only secure lower monthly installments but also lower interest rates due to the decreased risk of the lender.
The interest rate of your car loan is the cost of borrowing and it is one of the most important things to consider when getting a car loan. There may be dealerships that offer zero-interest loans, but it is not always the best deal. Sometimes, a loan with interest and rebate can be better. Don’t fall for the offer that looks best at first glance. Do the math to get the best deal.
Low Credit Score? Consider Subprime Loan
Your creditworthiness is important to lenders when they are considering you for a loan. There are several things lenders look for to determine if they can borrow your money such as your debt-to-income ratio and payment to income ratio. If you don’t meet their criteria, you can opt for subprime loans.
A low credit score doesn’t mean that you’ll automatically be turned down for a loan because some lenders are still willing to work with those who are considered subprime borrowers; thus, the subprime loan. A subprime loan is given to borrowers who have low credit scores. They may even be given to people who have no credit.
Do note that this type of loan comes with a higher annual percentage rate compared to a typical auto loan and in some cases, higher fees can be attached to a subprime loan. The reason for this is because of the increased risk of the lender, and it gives them a way to recoup some of their potential losses.