Cars can be a necessity for working professionals and students, while others find them a source of pride and passion. Whatever a car means to you, it is important to know what your financial situation is before buying one. If you don’t have enough savings to buy a car in cash, financing your car through a loan might be the best option.
A car loan is a loan taken out to buy any type of vehicle. It is then repaid in monthly installments with interest and conditions set by the lender.
Rule number one in getting a car loan is to not get the first financing option being offered to you. Tendency is you will be offered high interest rates and the terms and conditions may not really be favorable to you, but favorable to the dealership only. Here are 5 things to keep in mind to choose the right car loan.
1. Keep the Loan Amount and Monthly Payments Within Your Budget
Know how much you can afford to spend. Review your finances and check how much you can afford to pay for the monthly payments and stick to that. Cars are not assets or investments, and they depreciate very quickly. Make sure t the loan will not financially burden you more than it should.
If you can afford to, put in a 20% down payment. The bigger the down payment you provide, the less you’ll pay for a loan. This way, you’ll pay less on interests and owe less money to your creditors.
Keep in mind that there are miscellaneous expenses that come with purchasing a car like registration fees, sales tax and documentation fees. Some dealerships offer to roll these fees to your loan, which could mean a bigger total loan amount.
2. Short Loan Terms Are Good
Sales people will lure you into cheaper monthly payments for a longer loan term. Longer loan term means lower monthly payments, which can also mean a higher interest rate. Choose the lowest loan term that you can afford without sacrificing your budget. Cars usually have a useful life of 3-6 years so make sure your loan should be over by then.
3. Are Contract Clauses and Other Fees in Your Favor?
Read through the loan agreement and make sure whatever is stated there will not cause you problems in the future.
A lot of things can happen within your loan term. You can find a better loan offer and decide to refinance your car loan. You can receive an unexpected bonus at work and decide to make extra payments to your loan or pay it off early. Make sure you are allowed to do this without penalty charges. Check if there are any additional charges that your salesman is not telling you.
4. Know Your Credit Score
Before going to any dealership or financial institution, it is important to know what your credit score is so that you’ll know your chances of getting approved for a loan. A good credit score can get you a low interest rate. If the dealership knows you have a bad credit score, they’re not going to give a favorable interest rate for you.
5. Shop Around
Consult with multiple lenders first to get an idea of what type of loan is good for your finances before getting the car. By doing this, you’ll get an idea of how much you can afford. Most of the time, banks, credit unions and online lenders offer a better deal than the dealership.
Shop around and compare different loans that different financial institutions offer before stepping in the dealership, and use that knowledge to get a good offer. If you get to the point where a lender pre-approves you for a loan, use that as a bargaining power on the dealership to give you a lower rate.
Even if you have the means to purchase the car of your dreams, it doesn’t mean that you shouldn’t be smart about choosing a loan. To get the best deal out there, arm yourself with knowledge and use this as leverage.