10 Key Things to Know About Auto Loans Before Applying

0
134
Auto Loans

Credit where credit’s due, there are some great loans available out there. You just need to know where to look. We’re here to steer you in the right direction for the best auto loan to suit you.

Forewarned is forearmed. Don’t head off in the wrong direction. Read on for the complete lowdown on auto loans.

1. Finding the Right Car

You may already have your eye on a particular car. ‘Next up, I need to negotiate the price,’ you may be saying to yourself. Before you do any of this, it’s best to consider how to pay for your vehicle in the most economical way.

If you do this you’ll avoid any disappointment that comes with stretching your credit too far. Many of us don’t have sufficient resources in the bank to purchase a car. It could well be your next most valuable asset if you already own your home.

2. Advantages of Auto Loans

The loan you choose is going to be very important. Auto loans let you buy a car that costs more than you can afford with cash. Instead, you’ll borrow the money you need and then pay off your vehicle by making monthly payments.

If you borrow sensibly, you could spend less and perhaps save yourself hundreds of dollars. You may also be able to enjoy having the flexibility to change vehicles and fund other goals within a few short years.

It all comes down to careful planning and research. If you plan well, you’ll increase your chances of getting the loan you need and a car that matches your budget. When it’s time to make a deal, you’re going to be all set to proceed with confidence.

money, finance, business
nattanan23 (CC0), Pixabay

3. Your Credit Rating

Your credit rating taken together with the amount you earn is going to decide whether you’ll be approved for a loan.

It all comes down to risk for lenders. They will want to see your borrowing history. That will include whether you repaid prior loans on time. With a good credit score, you’ll get a better interest rate.

This means you’re going to end up paying less for your car. You should check your credit score by reviewing your credit reports. You should do this before applying for auto loans or visiting a dealership.

American consumers are entitled to a free credit report every twelve months under federal law. Take advantage of this so you can be sure your score is as good as possible. Mistakes are not uncommon, so check your credit report and fix any errors.

4. Different Types of Credit Score

Bear in mind that not all lenders use the same scoring system. Different lenders will use different criteria to decide a score. This means the minimum score needed to qualify for a loan may vary depending on which company is providing the financing.

Types of scores include FICO Auto Score 8 and Vantage Score 3.0. Find out which scores the lenders you’re interested in care about. Use that to determine which reports you request.

5. Improving Your Credit Score

There are lots of ways you can try to improve your credit score. Always make any monthly payments on other loans you have on time. This also includes your rent, utilities, and cellphone. Late or missed payments can harm your credit scores.

If you make a late payment by mistake, contact the lender or service provider. Explain what’s happened, and pay up straight away. Engaging with your lender is always a good idea.

Try to keep your overall credit card use to below thirty percent of your monthly income. Pay off any credit card balances you may have in full each month. If you do this, it shows you’re a responsible borrower.

connections, market, bond
kalhh (CC0), Pixabay

Opening and Closing Credit Card Accounts

Lenders like to see a mix of a few credit cards, and other installment loans such as mortgages. It’s a good idea to try and diversify the money you borrow. Clearly, you should only borrow what you actually need, however.

Take care not to apply for too many credit cards in a short time period. This is because every application generates a credit inquiry. Too many applications made too quickly can be a red flag to a lender.

The length of your credit history is also a significant factor in credit scores. Scoring models may take into account the average age of all your accounts. They could also factor in the age of your oldest open account.

It can be a good idea, therefore, to keep any old credit card accounts open even if you no longer use them.

6. Making a Budget

You’re going to need to work out how much you can spend. This will include the down payment and future monthly payments.

The downpayment is what you will pay upfront when purchasing your car. The bigger the downpayment, the smaller your loan will be, along with the future monthly payments.

The monthly payments will be for a specified length of time. Work out your other monthly outgoings. Keep the auto loan payment at a comfortable level. Factor in any unanticipated events that could affect your income.

7. Understanding Auto Loans

First of all, keep things in perspective. Avoid being tempted to buy a certain car or by particular fancy features if they do not fit within your budget.

Don’t just focus on the monthly payment. Consider the purchase price as a whole. That includes the total cost of the interest. It’s very important to sit down and think about this carefully.

Some auto dealers will want to focus your attention on the monthly payments alone. It’s a selling tactic. These can be dramatically reduced by extending the period of the loan.

Monthly Payments and Interest

The problem is the payback for this. The longer the loan payoff period, the higher the rise in the cost of the interest. It could mean that you end up owing far more than the vehicle is actually worth.

Making a small down payment may seem like a nice idea. However, it means you will need to borrow more money. This is going to have a similar effect as increasing the period over which you borrow the money to pay for the vehicle.

Again, it comes down to being sensible and realistic. ‘Cut your coat according to your cloth,’ is a wise old saying. Don’t overstretch your personal finances.

If you’re taking out a loan, a good rule of thumb is to make a downpayment of at least twenty percent. Take the loan for five years or less.

8. Different Types of Lenders

Auto dealerships are not the only place to look for an auto loan. You could also try credit unions, banks, or online lenders. In some cases, the dealer will not have the best auto loan. Do your research and compare the loans on offer.

Some online lenders won’t require you to have perfect credit to get a loan. Lenders such as Tiempo Loans may allow you to use the title from your boat, truck, or another vehicle you own to apply for a title loan.

Certain lenders allow you to borrow against the equity you already have in other assets. Always consult with alternative lenders before you go a dealer so you can weigh up what kind of loan is going to work best for you.

9. Overpayment Penalties

Check that your auto loan lets you make overpayments or even pay off the entire loan early without any penalty.

You may earn an unexpected bonus which would allow you to pay off the loan more quickly. What you don’t want is to be penalized by the lender for doing this.

This is where the small print comes in. Boring to read it can be, but it’s very important to understand the ins and outs of the loan you’re planning to take out.

10. Insurance Products

Some lenders may offer you life or disability insurance when you’re purchasing a car. Remember, it’s in their interest to sell you additional insurance with your loan.

Credit insurance could help to cover your loan payments in the event of certain unforeseen circumstances. It’s not usually a good idea to get credit insurance from your lender.

Check any life or disability policies you may already have. You might even be covered by a policy your employer has. Understand what these policies mean before you set off to buy your car.

Buying Extra Coverage

These types of insurance are available from lots of different sources. If you think you need coverage, do your research ahead of time and compare the prices.

When you borrow money to buy a car, your lender could repossess the vehicle if you fail to make the required payments. Make sure you always have a Plan B so that you and your loved ones are fully protected.

Driving off Into the Sunset

When you buy a car, you need to be sure it fits within your budget. Understanding how auto loans work should be one of your key considerations. This includes the downpayment, monthly repayments, and interest rates.

Continue reading articles in our auto section for more helpful auto-related articles.