An auto loan can make the process of purchasing a good, reliable car much faster. They remain a popular choice among drivers of all walks of life, allowing us to budget for a new car, rather than save up over months – or even years.
Read more below about the top five things to take into consideration before you commit to an auto loan.
1. How Your Credit Score is Used by Lenders
Lenders need to understand more about you before accepting you for a loan, and they can do this by performing a check on your credit score, which offers insight into your history of loan repayments and credit utilisation. They will use this information to ascertain your potential risk-level as a borrower; they want to feel confident that they will not lose money on your loan, and will respond to a positive score with more competitive rates.
2. Why You Should Opt for Preapproval
It is important to compare plenty of lenders before committing to a loan, but having numerous searches on your credit score can cause it to take a hit.
Fortunately, you can seek preapproval first; lenders can assess your eligibility through a soft creditpull, which will not harm your score, and only when you are sure about taking a loan with them will they follow-up with a hard pull.
3. What Impacts the Cost of Repayment?
In order to repay the auto loan, you will need to make a series of monthly payments with interest over a predetermined duration (loan term). In addition to the results of your credit pull, the cost of these payments will vary based on a number of factors.
Whether you choose fixed or variable interest plays an important role in the cost of the loan, particularly if you are opting for a longer repayment term. It is crucial you understand which option is better for your circumstances; bestautoloans.com covers it here – along with an explainer on how each type plays out over different terms.
Of course, the size of the loanitself – and how long you wish to spend repaying it – will significantly impact the monthly cost. A smaller loan will entail lower payments, but a longer term will typically cause interest rates to rise. If you wish to take out a larger sum and pay it back over a short period, the payments will be high but, provided you have a good credit score and DTI-ratio, the interest will be more competitive.
The car you choose to purchase with your loan will also have some bearing on the interest rates available to you.
4. How the Car You Choose Impacts Interest Rates
Even though you are using a loan to pay for your vehicle rather than saving for a lump sum, you should only consider cars that correspond with your financial situation. If not, you could end up finding that the monthly payments are not manageable, which may lead to the car being repossessed, and you credit score taking a hard hit as a result.
Choosing a new car will help to keep the interest rates low, as your lender can trust that – should you default on your loan – they will be able to recoup their losses by repossessing the vehicle and selling it on for a good price. But, with the average cost of a new car falling between $20,000 and $55,000, you will either need to provide a good down payment to keep the payments manageable, or settle with a high monthly sum.
A second-hand car is less attractive to lenders, who will not benefit from such a high resale value if something goes wrong with your ability to repay the loan. For this reason, interest rates will generally be a little higher, but the overall cost of the loan is likely to come out much lower.
5. How to Budget for Your Repayments
It is essential that you are confident that your monthly budget allows for the loan repayments. If not, you risk putting yourself into debt, which will make it much harder for you to find competitive loans in the future.
Don’t commit to a loan immediately, even if it seems to be ideal; most lenders will give you about a month to respond to their offer. You should take the time to look at the offer and then try to compare against others for which you may have applied. Take a look at your finances, calculate the cost of your other bills and obligations, and ascertain how much you can comfortably accommodate each month. Do not overstretch your finances to a point where, should something occur such as an emergency financial necessity, you may not have enough money to meet all your commitments.
Remember that running a car entails other costs, too. Insurance, gas, maintenance – even parking and cleaning – all add up over the course of a year, and you don’t want to find yourself on unsteady ground with your finances.
auto financing concept -DepositPhotos