Unless you have thousands of dollars sitting in your bank account, the only possible way to buy a car is through an auto loan. It’s a form of financing that allows someone to borrow money from a lender, and then pay off the balance over the course of a payment plan. There are nearly 109 million active auto loans Americans are using to affordably own a car, and there are some important things to know if you want to apply for one. Not everyone gets accepted for auto loans, so understanding what’s needed is vital for drivers to get accepted.
The price of a new vehicle is steadily increasing over the years, with the average price nearing $40,000. If you’re looking to buy a car, here is what you should know before applying for an auto loan.
What Is An Auto Loan?
Auto loans can be obtained for both new and used vehicles. These loans are secured against the vehicle you intend to purchase, making it collateral in the event you are unable to make the scheduled loan payments. The monthly payment consists of the loan amount, loan term and the interest rate.
It’s important to remember that when you buy a car, you won’t only be paying for the auto loan each month. There is also the initial down payment, insurance premium, gas money, and other expenses that you need to consider before committing to an auto purchase.
How To Get An Auto Loan
To get an auto loan, you can go to a dealership and have a financial advisor get you approved for a loan. But you can also take more control of your potential loan and secure financing before heading to dealerships.
Know What You Can Afford
You should know the type of vehicle you can afford before considering an auto loan. Make sure you know the amount you’re willing to pay on a down payment and how much money you can spend monthly to afford future loan payments. It will also prevent you from being talked into steeper financing options from professional car salespeople.
Check Your Credit Score
One of the most important parts of obtaining a loan from a national bank, online lender or credit union is your credit score. Potential lenders use your score to determine how you qualify to borrow and what the interest rate will be. Get a copy of your credit report and make sure it’s accurate and there are no errors that could prevent you from getting a loan.
You should be within a certain credit score bracket before considering the purchase of a vehicle that’s not absolutely essential. The average score needed for a new car is 718, and 659 for a new vehicle. It is possible to obtain a loan with a credit score below 600, but experts recommend that you work to improve your credit score beforehand.
There are a number of things you can do to raise your credit score. Pay your bills on time, pay off existing credit card debt, or seek advice from a financial advisor. Do this for six months and you should see an improvement on your score.
Get Pre-Approved Before Shopping
To get an idea of what lenders will offer you on a loan, you can get pre-approved. This will also give you time to prepare your finances and keep your options open when it comes to signing a contract. The lender will be able to tell you how much money you can borrow for the loan.
Plus, getting pre-approved gives you more leverage on negotiating the vehicle cost down with auto dealers. The dealer won’t be involved with your financing situation. All they have to decide is whether or not your offer on the car is good enough for them to write up the paperwork.
Do Your Research Before Going To The Dealership
Buying a vehicle is a major financial decision. That’s why you want to do everything you can beforehand to make sure you’re aware of potential setbacks and tricks.
Remember the ultimate goal for a car salesperson is to sell a car. They’re trained to convince you into monthly payments that aren’t in your best interest. They could mislead you on how great it is, and then manipulate you into an unwanted term length or interest rate.
Set a budget before talking to a lienholder. Before settling on an auto loan, compare your options and see what each of them offers you. Financing can vary from company to company and doing your research can help you find a loan that’s right for you.