After a home, a car is usually the second most pricey purchase people make. Credit tracking company Experiment estimates that 80% of novel cars and 38% of used cars are purchased with credit.
Just like with a car itself, there are many different companies offering different types of finance products, so it’s crucial to do some research and comparison before making a decision. It’s a massive decision that can seem overwhelming, but we hope this primer will assist you in the process.
1. Know your creditworthiness
Your credit score will have a massive impact on your car loan, including how much money you can borrow and what your interest rate will be. This, in turn, will determine how much your monthly payment will be and how long it will take you to pay off the loan.
There are three main credit tracking companies: Equifax, Experian, and TransUnion. You can utilize any of them by going to the website AnnualCreditReport.com. These credit reports are free, so be wary of anyone who charges a fee for them. Your credit report is also a good way to check if there is any fraud on your account.
The higher your creditworthiness, the lower the interest rate. Experian has breakdown how your credit score ranks, but this is not fixed once and for all. Different lenders will consider these numbers differently, within reason.
2. Look around
Once you know your credit score, you can start looking for the best loan. The most popular places to get a loan are:
- Banks: These institutions usually offer decent rates, but usually require an above-average credit score to qualify. You may also need to have a bank account. Larger national banks usually have convenient apps and websites to make payments easier.
- Jumping: These community-oriented lenders will usually have the best rates. You’ll probably need to be a member of a credit union, but some are straightforward to join. They may not have the convenience of a enormous national bank, but if you’re concerned about overall costs, credit unions are generally your best option
- Online lenders: They have no physical locations and offer loans with interest rates competitive with banks. You can get quotes from multiple lenders in one place,
- Dealers: Finally, novel and used car dealers will be cheerful to finance your loan for you and process it with the sales documents, but there is a price for convenience. Interest rates will likely be the highest of all the options listed unless they offer a special promotion.
Buying a car is all about negotiation, and a loan is no exception. You may be able to get better terms by telling the lender you’re looking for a loan.
3. Know your budget
A series on the Internet car loan calculators can assist you calculate your monthly payment and the total amount you will spend until the loan is paid off. You can extend the loan term to get a lower monthly payment, but it will cost you more in the long run.
Take into account that you will need to factor in insurance, fuel and maintenance in addition to your monthly payments. It’s also a good idea to save on larger repairs.
4. Get pre-approval
Once you’ve selected a few lenders, it’s time to get pre-approved for a loan. This is different from pre-qualification, where lenders estimate what the terms of the loan will be. Pre-qualification requires what the financial industry calls a “pliable pull” of your credit score, which is not as detailed as a “demanding pull” before approval. By getting pre-approved, you are not obligated to commit to a lender if you find a better deal.
Pre-approval will give you the most exact numbers of what you can expect once your loan is finalized. However, if you want to get pre-approved by multiple lenders, each time the reductions will lower your credit score slightly. It is best to arrange this so that different lenders carry out credit checks within one to two weeks, which will reduce the impact on your credit score.
To get pre-approval, you may need to provide documents including proof of identity, proof of income (e.g. pay stubs) and Social Security number. Additional statements showing your assets may assist you get a better rate. If you have recently moved, the lender may ask for proof of residence (such as a mortgage statement or rental agreement) and may also ask for the year, make and model of the car you intend to buy.
5. Finalize the loan
By now you should have narrowed it down to one lender. Thanks to pre-approval, you can look for a real car. It may be worth your while to see if the dealer can beat the loan you’ve been pre-approved for. Sometimes they offer promotions with low or zero interest.
Once you have selected your car and agreed on a purchase price with the dealer, notify your lender. They may ask for additional information, including year, make and model, VIN, purchase price, vehicle registration and proof of insurance. At this point, you will give the dealer a down payment and the lender will provide the remaining funds. If you choose to utilize the dealer’s financing plan, they will take care of this part for you.
It’s finally time to pick up the keys and drive away in your novel car!