When shopping for a new or used car you need to decide on how you’re going to pay for it. If paying for the car with cash isn’t enough, consumers may need a car loan to finance the purchase.
Below are a few car financing basics to get an understanding of how these particular loans work, and how you can get the best loan for your vehicle. You apply to borrow money from a lender and pay them back over time with interest.
Also factor in that you will pay taxes and fees plus additional expenses associated with owning a car. Look at factors such as insurance, gas and maintenance before determining which car may be in your budget.
This means the amount of time given for you to pay back the loan. The majority of car loans are repaid with monthly installments, sending the lender a set amount each month. A longer auto loan might result in a lower monthly payment, but over the long haul, you’ll pay more in interest.
Under the terms of the loan, the car is in your possession, but it still belongs to the lender. You won’t have the title of the car and own it fully until the last payment is made on the loan. If you miss any loan payments at the lender’s discretion, they can repossess the car.
Your credit score is an important determining factor as to how low or high your interest rate will be.
The lenders look at how consistent you are in paying bills, how much debt you have and how long you’ve had credit. These scores can determine how likely you are to pay back the loan so if your score is low, they will charge you more to cover that risk.
Even people without any credit or little credit can be subjected to higher interest rates. Always know what’s on your credit report before you apply to make sure it’s correct and there are no discrepancies. Always keep your credit score high and if it’s not, pay off old debt and paying bills on time can help increase your score and get a better rate.
Seek out multiple lenders
Don’t put all your eggs in one basket by just applying with one lender. Look to other institutions such as your personal bank or credit unions to see what types of rates and incentives are offered.
Don’t just look at the interest rates look out for loans that charge a penalty to pay the loan off early. Watch out for loans that charge excessive fees. It’s important to know that if you do apply through multiple lenders, do them all at once or as close as you can. Apply within the same week if possible.
The three credit bureaus Trans Union, Experian and Equifax will monitor your applications and know that you’re looking for an auto loan. If there is a gap between applications this can lower your credit score.
Make an initial payment
Come to the lender or dealership with a down payment. This can determine your interest rate and what your monthly payments will be. Pay as much towards the down payment and if you have a car to trade in you can get a nice price on a car. Keep in mind that if you get a great deal on the car you can still be charged a higher rate on the loan.
Kaia is a freelance writer for MyBankTracker who specializes in real estate, saving and banking.