When you decide it’s time to buy that new car you’ve been wanting, unless you are in a position to pay cash you’ll need to get a loan. For a lot of people, that step in the process is last, but do yourself a favor and think about that loan first, before you do a test drive.
By going into a dealership knowing what a good loan looks like for you, you’ll be in a much better position to make the right decision regarding your new car and the loan you get to pay for it. You need to do your homework first.
1. Find out what your credit score you have.
Keep in mind that not every lender looks at the same credit score type. According to Forbes, Equifax Beaon 5.0, Experian/Fair Isaac Risk Model V2SM and TransUnion FICO Risk Score Classic 04 are the credit scores looked at by most lenders. You can check on your scores once a year at no cost. A low credit score can mean you won’t get a loan, or the one you do get will cost more.
Every time your credit scores are checked your credit score will decrease a little. But, you can mitigate this if you apply for a loan within 14 days of checking on your score. After those two weeks, checking your score and applying for a loan will count as two hits on your credit; apply for a loan within 14 days, however, and the two checks will be considered as one.
2. Know what kind of payments you can afford.
It’s tempting to take out a loan that has low monthly payments are low. But to make it low, you often need to extend the life of the loan by a few years, and that means you’ll pay a lot more interest. On the other hand, getting a loan with higher monthly payments in order to get it paid off sooner isn’t always a good idea either; your circumstances might change to where you can’t make a high payment, in which case you’ll probably have to refinance your loan.
While the APR has a fairly small effect on the amount of your monthly payments, a good down payment (generally 20%) and a smaller loan can decrease that amount. A loan with a longer repayment term can lower your payments, but, again, you will probably end up paying more in total. You’ll need to weigh these factors before you decide on a loan amount.
3. Get pre-approved for a loan.
Know what rate you qualify for. Get pre-approved at a credit union, bank, or through an online lender. You may be pre-approved for more money than you end up spending to purchase a car, and that’s fine. What you don’t want to happen is to find out what kind of loan you can get after you settle on a car. With a pre-approval, you go into a dealership already knowing what you can afford. Plus, you’ll have more leverage when you negotiate price.
4. Consider your options for where to get a loan.
Even if you have a pre-approval from a bank, credit union or online lender, the dealership can also fund your loan. A dealer may offer a good deal such as 0% financing and cash back rebates, but keep in mind that unless you’re among the most qualified buyers, have absolutely nothing negative on your credit report, have a high FICO score, or have a long credit history, you probably won’t qualify. Shop on our Einsurance Auto Loan Quote Comparison before making you decision.
5. Know which kind of purchase promotion is right for you.
If the dealership offers cash rebates or 0% financing and you qualify, know which is better for you. The no-interest option might not be as beneficial as a cash rebate along with a low-rate loan. If you reduce the overall cost of the vehicle you want to buy by applying a cash rebate, the amount of money you have to borrow will be lower. A 0% APR loan will save you in the long run, but you should consider which will be less costly, a no-interest loan at a higher loan amount or a low-rate loan with a rebate that lowers the loan amount. If you know the pay-off term, such as 60 months, you can use an auto loan calculator to compare paying a higher loan amount at 0% APR to 0% APR loan at a lower rate loan with a rebate that lowers the loan amount.
Arming yourself with the right information will help you make the best decision about how much you can afford to borrow and whether a loan offer is right for you. As with auto insurance, shop around before you make a decision about your loan. Then, you’ll have peace of mind when you drive your new car off the lot.