Car loans offer an affordable way to buy vehicles, with fixed monthly payments directed towards principal repayment and principal reduction each month bringing you one step closer to full ownership of the vehicle you desire.
Your eligibility and terms for a loan depend on a range of factors, including your credit history and income. Review your report for errors before starting to shop around for loans.
When you have good credit, lenders can generally tell you how much of a car loan they can offer you. Some online preapproval processes take only 15 minutes; in order to do this, they require your social security number, driver’s license information, income information as well as any amount set aside as a down payment on the vehicle and any recent debt repayments.
Applying for preapproval can have a lasting effect on your credit score, but applying to multiple lenders at once will reduce its effects. Your credit report will treat them all as one hard inquiry inquiry and thus decrease any possible negative repercussions to your score.
Preapproval gives you an accurate sense of what your budget can handle for purchasing a car, enabling you to focus on only those cars which fit within it. Furthermore, preapproval puts you in an advantageous negotiating position at dealerships since your lender provides you with their interest rate quote directly versus one inflated by them.
Choosing a Loan Term
Loan terms (the length of time it will take you to repay your loan) can be one of the most consequential decisions when purchasing a car, as they affect both monthly payments and total cost of loan repayment.
An extended loan term typically results in lower monthly payments; however, more interest will accrue over the life of your loan. Therefore, any decision about choosing such an extended term should always take your goals and current situation into consideration.
If you have bad credit and need to quickly eliminate debt, opting for a shorter-term loan will often be best; it will allow you to reduce interest costs and prevent more debt accumulation.
Getting a Loan
Car loans typically involve signing a contract and paying monthly installments that include both principal and interest. If your credit score falls short of perfect, higher interest rates could apply.
Before heading out car shopping, research loan offers from both direct lenders and online car-finance marketplaces. Make sure to compare loan terms, monthly payments, interest rates and any other terms associated with each.
A down payment, whether in cash or trade-in form, can help to lower the total loan amount you need to borrow and also improves your debt-to-income ratio (the ratio lenders use to determine if you can afford your debt payments).
Some car manufacturers provide special financing at below-market interest rates on brand vehicles purchased through dealerships. It’s wise to shop around for financing before entering a dealership as some dealers mark up rates; additionally, see if you can get preapproved for an auto loan from your bank or credit union.
Buying a Car
Car buyers have various options when purchasing their vehicles, from outright purchases to financing them over time with monthly payments plus interest and additional fees.
Get preapproved by an outside lender can make the loan application process simpler and increase your negotiating power at the dealership. Be sure to compare loan terms and APRs (annual percentage rates inclusive of interest and fees) from various lenders before making your final choice.
Dealerships also may provide manufacturer-sponsored, low-rate financing or other incentives to attract customers, but often make these offers dependent upon certain models or requiring strong credit scores. It’s wise to research these programs beforehand and use a car payment calculator as another helpful way of estimating what you can afford and then negotiate for the price that fits into your budget; remembering loan payments, insurance premiums, gas costs and maintenance expenses in determining this total spend limit.