Everyone has that one dream car. But sadly, not everyone has the cash to go out and purchase it. Luckily for us, auto loans are a thing.
Auto loans are a convenient way to buy a car if you lack the cash. However, here are a few things to know before you apply for one. So with all that said, let’s start.
Your Credit Score
Whenever getting any sort of loan, the first thing banks see is your credit score. Your credit score is probably the most important factor that matters. But it’s not just banks that look at your credit score, auto loan dealers and dealerships also rank this factor the highest.
Your credit score is nothing more than a number in their eyes. This number represents your financial power. The higher the number, the better rates you’re going to be given by banks, car loan dealers, and dealerships.
Plenty of factors affect the credit score number. The most common ones include your payment history, amounts owed, credit history length, credit mix, and new credit.
There are also ways to improve your credit score number. The easiest way to do that is to pay your payments in time. Every time you miss a payment, your credit score goes down. A great way to improve your credit score is to also catch up or pay past dues. While many other ways exist, it’s important to understand that without a good credit score, your chances of obtaining an auto loan are very slim.
Get Pre-Approved First
Much like buying your dream family house, getting pre-approved puts you in a strong position to negotiate when buying your dream family car.
If you can’t pay in cash, then it’s best to show up at the dealership with a financing offer from the bank or auto loan dealer. This offer guarantees the dealership that you have what it takes to buy a vehicle. The offer simply tells the dealership that you are financially strong enough to buy a car.
As we said earlier, getting pre-approved puts you in a very strong bargaining position as you’re essentially a cash buyer. This means that you can start negotiating with the dealership in hopes of buying a vehicle for much less.
Look At All the Costs
One thing you should always do before applying for an auto loan is to take a long and hard look at all of the costs. You might think that the annual percentage rate is the only factor worth considering, but there are tons more.
For example, a down payment is something that all car dealerships ask before you can purchase your dream car using an auto loan. The loan term is yet another factor that tells you how long you will be repaying the loan.
While there are loads more, you should familiarize yourself with all of them to get a better feel of what taking an auto loan actually means. Sure, an auto loan lets you purchase a vehicle if you don’t have the cash but there are other things that they’re not telling you.
The best way to approach this one is to go online and look for an auto loan calculator. This calculator will include all the factors worth considering.
Determine Your Budget
Whenever thinking of taking out an auto loan, you should set a budget. A budget is a great way to make sure you’re not overspending on your car.
But how do you do that? Well, whenever taking out an auto loan, you’ll be given the total cost. This also takes into account the interest rates, the cost of the vehicle, and the number of payments.
You’ll pay much lower interest rates if you go for a shorter loan period. A 5 year repayment time means you’ll pay higher monthly rates, but pay much less in interest. You might be tempted to go for a longer repayment time, such as 10 years, but do know you’ll pay less each month but more in interest.
This can be an issue if the overall cost of the car with the loan doesn’t fit your budget. If your budget is $25,000 for a car, but the overall cost comes at $28,000 over 10 years, then you should consider shortening the duration of the loan. Regardless, a budget will make sure that you don’t go overboard and potentially end up in a financial pickle.
If you lack the cash, buying a car is possible with an auto loan. But before you go and apply for one, make sure to consider these 4 things. Banks and auto loan dealers do make it easier for us to buy our dream car, but it does come at a higher cost.