Getting a car is a luxury that comes with some challenges which explains why some people do not even see it as a luxury. For someone who cannot completely finance the purchase of a car in one payment, these challenges appear to build up so fast so the only reasonable thing to do is get a lease or a loan.
Going for a lease means that the car won’t be fully yours. You’re just renting it for a while but if you go the path of an auto loan, you’d be able to lay a stronger claim to the vehicle.
Different banks and credit unions give varying rates for their loans and these rates may drastically reduce or increase based on several factors. Before we consider these factors, let’s run through some of the terms associated with auto loans and car purchases.
Credit score: This is a number on your credit report that indicates how deserving you are of a loan. The basic factor used to calculate your score is your payment history – how fast you pay up. The higher your score, the lower your interest rate.
Pre-approval: A pre-approval, contrary to popular belief, doesn’t mean you’ve been licensed to get a loan. It only means that your records have been checked and verified and you’ve passed the initial stage to get an approval.
Interest or finance charge: When you apply for a loan, you would get the money at a cost. No bank or credit union would give you a loan for free. The percentage you pay on the loan is the interest.
Loan term: This tells you how long you have to finish paying up your loan. If you opt for a longer loan term, you get to pay more interest which may appear little initially but builds up with time.
Down payment: This is the amount of money you pay upfront. You have to make a down payment before getting your car on a loan. After the down payment, the remaining cost is calculated and spread over your loan.
Once you have a clear understanding of all the terms you’d come across when conversing with the bankers and agents involved in the loan process, the difficulty level of acquiring a car drops by a step. The next thing we’d consider is how to get the auto loan.
• Review your credit report.
Credit scores build up over time when the borrower fulfills certain favorable terms and the day the borrower comes for a bigger loan, that score would play a crucial role. The lower your score is, the lower your chances of getting a huge loan and the higher your interest rate would be. No financial institution would want to part with a huge sum of money to someone who has a track record of repaying loans late or has some suspicious activity going on with his credit card.
If your credit score is above 600, your interest rate may be surprisingly low and the reverse would be the case for credit scores lower than 600. Therefore, it would be reasonable to wait until you have a relatively high credit score before applying for an auto loan.
• Compare loan terms and interest rates.
Get quotes from big banks, community banks and other credit unions around. See which one offers the “best” and most suitable loan terms and interest rates then keep that in mind. Don’t jump on the offer immediately because some loans come with extra fees that you may not know of and at the end of the day, you may find yourself paying more than you expected.
Your local bank may offer you a lower interest and online lenders allow you to compare quotes more easily.
• Check your budget.
This is another crucial factor to take into consideration. As a borrower, you should settle down and plan your repayment schedule even before the bank gives you one. How much do you earn? How much of your salary can you part with in a month? How long can you keep doing it? Do you have any other big project that may take up your money in that same period?
If you get a loan and can’t pay when due, you’d not only be cutting down your credit score, you’d also be inviting embarrassment.
• Apply for pre-approval.
When you’ve taken a stand on the first few factors, the next step is to apply for pre-approval. It’s advisable to do this at least, two weeks before going to get the keys from your car dealer. This would reduce the shock on your credit score.
A lender may either offer a pre-approval or pre-qualification. Pre-approval informs you of exactly how much interest you would have to pay whereas a pre-qualification suggests a range of how much interest you may end up paying. Apparently, pre-approval would be more suitable.
However, you should be ready to provide details surrounding other debts you’ve taken in the past, your net income and other private information that would help them grade your interest rate and loan term.
• Find out additional costs.
Cars usually come with extra fees but the excitement of owning a car may blind you from seeing those tiny things. Check with your dealer and state laws for costs that accompany purchasing a car. Some of these include license fees, taxes, and the dealer’s fee.
• Plan your budget.
Instead of checking your budget and approximating how much you can pay without having to starve for the rest of the month – with your pre-approval and loan terms, you can plan your budget around that instead of guessing. If the interest is higher than you initially planned for, look for a way to balance it up. Don’t wait till it’s 24 hours to repaying before you begin to source for cash.
From this point, you could take a trip to the car dealer to choose the automobile that you’ve always had your eyes on. Take your pre-approval along with you and ask any and every question you may have. After all the stress you’ve been through, it wouldn’t be nice to have a vehicle you can’t drive to certain places or end up on the streets begging for money – so be smart so you can enjoy and drive stress free!