After a house, a car is often the second most expensive item people will buy. Credit monitoring company Experian It is estimated that 80% new car and 38% of used cars purchased with the help of a loan.
Like cars, there are many different companies offering different types of financing products, so it’s important to do some research and comparison before committing. It’s a big decision that can seem overwhelming, but hopefully this primer will help the process.
1. Know your credit score
Your credit score determines a lot about you car loan, including how much you can borrow and what your interest rate will be. That will determine how much your monthly payments will be and how long it will take before you pay off the loan.
There are three major credit monitoring companies: Equifax, Experian, and TransUnion, and you can use any of them by visiting AnnualCreditReport.com. These credit reports are free, so be careful of anyone who charges a fee to do this. A credit report is also a good way to check if there has been any fraudulent activity on your account.
The higher your credit score, the lower the interest rate. Experian does an incident about your credit score ranking, but this is not set in stone. Different lenders will look at the numbers differently, with reason.
2. Shop around
Once you know your credit score, you can start looking for the best loan. The most popular places to borrow money are:
- Bank: These institutions typically offer reasonable rates but will often require an above-average credit score to qualify. You may also need to have an account with a bank. Larger national banks tend to have convenient apps and websites to facilitate payments.
- Credit Union: These community-oriented lenders will often have the best rates. You may need to be a member of a credit union, but some are easy to join. They may not have the convenience of a large national bank, but if you’re concerned about total costs, credit unions are generally the best choice.
- Online lenders: These places have no physical locations and offer loans at interest rates competitive with banks. You can get quotes from multiple lenders in one place,
- Agency: Finally, new and used car dealership are happy to fund the loan for you and handle it along with the paperwork for the sale, but there is a price for convenience. The interest rate is likely to be the highest of all the options listed unless they are offering a special promotion.
Buying a car is all about negotiation and a loan is no different. You may be able to get better terms by letting the lender know you’re looking for a loan.
3. Know your budget
Some online auto loan calculator can help you calculate your monthly payments and the total amount you’ll have to spend by the time you pay off your loan. You can extend the term of your loan for a lower monthly payment – but it will cost more money in the long run.
Consider that in addition to the monthly payments, you will have to take into account insurance, fuel and maintenance. You should also save money to study any major repair.
4. Get pre-approval
Once you’ve chosen a few lenders, it’s time to pre-approve your loan. This is different from pre-qualification, in which the lender gives a rough estimate of your loan term. Pre-qualification requires what the financial industry calls a “soft pull” of your credit score, which is not as detailed as the “hard pull” of a pre-approval. By getting pre-approved, you are not obligated to commit to a lender if you find a better offer.
A pre-approval will give you the most accurate numbers of what you can expect when you close on your loan. However, if you want to get pre-approved by multiple lenders, each pull will lower your credit score a little. It’s best to arrange to have your credit checks run by different lenders at intervals of one to two weeks, which will reduce the impact on your credit score.
To get pre-approved, you may need to provide documents, including proof of identity, proof of income (such as pay stubs), and Social Security number. Additional reports showing your assets can help you get better rates. If you have recently moved, the lender may require proof of residency (such as a mortgage statement or lease), They may also ask the year, make and model of the car you are planning to buy.
5. Finalize your loan
By now, you should have narrowed it down to one lender. With pre-approval, you can shop for the actual vehicle. It might be worth giving it a try seller it may be possible to surpass a loan for which you were pre-approved. Sometimes they offer promotions with low or 0% interest rates.
Once you’ve chosen a car and agreed on a purchase price with the dealer, notify the lender. They may request additional information, including year of manufacture, make and model, VIN number, purchase price, vehicle registration and proof of insurance. At this point, you will pay the seller up front and the lender will provide the remaining funds. If you decide to use a dealer’s finance plan, they will take care of this part for you.
Finally, it’s time to grab the keys and drive away in your new car!
