Are you on the hunt for auto financing, but wondering how to get a car loan? If so, you want to consider all relevant factors before you sign on the dotted line.
Many factors come into play when deciding where and how to get a car loan. If you fail to take all things into account, you can wind up paying more than you expected or agreeing to terms you later regret.
Keep reading to learn seven factors you should think about when you get a car loan.
Credit Score
Before you begin the application process, you want to check your credit score and review your credit history. Your credit score, along with a variety of criteria, will help determine whether you qualify for a loan and the annual percentage rate (APR) for your loan.
Many lenders will gladly offer loans to you even if your credit score is 600 or lower. However, you will pay the highest interest rates to do so, which will add thousands of dollars to the total amount you pay back over the life of your loan.
A few months before you plan to get your auto loan, check your credit report to see if there’s anything you can do to improve your score. This might mean disputing inaccuracies, getting utilization rates under 30% or settling delinquent debts. Even small changes in your score can save you money.
Car Loan Term Length
Your loan term length refers to the number of months or years you agree to repay your loan. You will commonly see this written as 60 months, 72 months, etc.
Your auto loan term can range from 12 months to 96 months depending on your credit, the year of your vehicle and your lender.
You will find that the longer your term, the lower your monthly payment. However, you will pay a higher interest rate and therefore pay more over the length of the loan.
You want to find the right option for you based on your current financial situation to minimize your interest rate and keep your payments affordable.
Annual Percentage Rate
The annual percentage rate (APR) has been mentioned a few times already, and that’s because it can have a significant impact on your monthly payment and how much you pay over the length of your loan.
The APR is the percentage you pay to your lender to borrow the money. You will sometimes see this referred to solely as the interest rate. Your APR can range significantly between zero percent interest for special financing offers to over 20% interest for those with subprime credit.
The more risk your lender is taking by loaning you the money, the more interest they will charge you and the more expensive your loan will be.
Car Loan Down Payment
Usually, when you get a car loan, you’ll be required to make a down payment.
Your down payment rate may vary, but it removes some of the risks for the lender by allowing them to get money in advance. Also, it reduces how much you owe on the car, which decreases your likelihood of going upside down on your loan. Being upside down on your loan means that you owe more than it’s worth.
There are some 100% financing opportunities, but keep in mind that your payment will be higher and so will the amount you pay in interest for your loan. You want to put some money aside in advance for a down payment, so you’re prepared when it’s time to get a car loan.
Early Payment Penalty
While you agree to a set term for your auto loan, you might decide to pay it off early. In that case, will you face a penalty? That’s one point you have to confirm.
The early payment penalty or prepayment penalty is accessed because a lender won’t earn as much money in interest if you pay off your loan early.
This information might not be offered initially, so you want to make sure to read the terms and conditions.
Car Loan Pre-Approval
Getting a pre-approval for your auto loan is the way to go. You can do this through your local bank or credit union.
When you get a pre-approval, you know that if all goes well, you have the financing to purchase the car you want. This is better than going the opposite route when you find the car you want then discover that your financing won’t approve it.
Also, when you shop with a pre-approval, you have more leverage as a buyer. A pre-approval letter allows you to negotiate better with car salespeople regarding your purchase.
Type Of Lender
While you’re considering all of the factors related to getting an auto loan, you also want to think about the kind of lender you should work with. The three most common options are a bank, credit union, or dealership. Each option has pros and cons.
The dealership is known for offering higher interest rates, but they work with several lenders to find one that will provide the best financing of those in their network. Some dealerships also offer ‘buy here’ and ‘pay here’ options where they provide the funding inhouse. This is typically for subprime borrowers who don’t qualify for credit elsewhere.
The bank and credit union are similar. They both tend to offer better interest rates. However, since credit unions are not for profit, they tend to have the lowest interest rates and are more likely to work with you if you need help securing your financing due to credit, income, or employment problems.
Choosing the right lender can make all the difference in your auto financing process.
Preparing For How To Get A Car Loan
No doubt that figuring out how to get a car loan and all of the details related to a loan can get tricky. That’s when being knowledgeable about what’s available and the terms that can affect your loan becomes important.
At Chartway FCU, we help you get an auto loan the smart way.
Find more information about car financing in these resources: