Many people who are shopping for a car spend weeks trying to get the lowest possible price, but few put in the same effort to find car loans. Don’t make this mistake. All car loans are not created equal. Taking the time to find the best car loan could save you hundreds or even thousands of dollars, which is why it’s so important. If you’re shopping for a new or used car, follow these tips to get the best car loan possible:
Shop for the Loan First
You should start your search for the best car loan before you start shopping for the car itself. Why? If you shop for the car first, you may get pressured to finance your auto loan through the dealership.
While it may seem convenient to get your car and car loan from the same place, dealerships often charge the highest rates. The convenience of getting a car loan at the dealer is not worth the price you will pay for financing through a dealer.
Before you start shopping for a car, research lenders and compare quotes. This way, you can take your time reviewing your options and choosing the right loan for you.
Read the Fine Print
Never sign an auto loan agreement without reading every word, including those in the fine print. Carefully reading through your loan paperwork will ensure you understand the terms before you commit to the agreement.
Every loan is unique, but there are some things you should look out for when reading your agreement, including:
- Variable interest rate: If your loan has a variable interest rate, this means the interest rate can change, which could cause your payments to suddenly go up. These loans are risky, which is why it may be best to choose a loan with a fixed interest rate instead.
- Prepayment penalties: Some lenders charge borrowers with prepayment penalties if they choose to pay off their loan in full earlier than expected. Make sure you understand if you will incur these fees and if so, how much you will be charged.
- Check the numbers: Review all of the numbers, including the interest rate, down payment, principal, monthly payment, and purchase price of the vehicle, to ensure they are correct.
Don’t be afraid to ask questions if you see something you don’t understand. You should not sign the agreement until you are satisfied that you completely understand the terms of the loan.
Know Your Credit Score
Your credit score can impact the terms of your loan. If you’re thinking about buying a new or used car soon, start preparing now by checking your credit score. If you have a high credit score, your focus should be on maintaining it until you are ready to take out an auto loan. A high credit score will help you secure more favorable loan terms.
But if you aren’t satisfied with your credit score, make an effort to increase it before you take out an auto loan. Here are some simple ways to improve your credit score in a short period of time:
- Look for errors on your credit report. If you see an error, contact the credit bureau right away to get it removed.
- Make on-time payments on all of your debts.
- Do not take out any new lines of credit.
- Ask for credit line increases on your credit cards.
- Avoid making large purchases with your credit cards.
Select the Shortest Loan Term You Can Afford
The loan term is the amount of time you have to repay the loan, and it is typically expressed in months. If you are taking out a car loan, the lender might give you several options when it comes to your loan term. It’s important to know how to evaluate your options if you are given this choice.
The longer the loan term, the lower the monthly payment. This makes loans with longer terms more attractive to borrowers. But although monthly payments are lower, interest rates on these loans are typically higher. Plus, the longer it takes to repay the loan, the more you may end up paying in interest. This means you will end up paying more over the course of the loan if you choose a longer term.
This doesn’t mean you should choose the loan with the shortest term just to save money. Monthly payments are higher on loans with short terms. If you can’t afford a higher monthly payment, choosing this option isn’t wise. Instead, it’s best to consider the monthly payments and choose the loan with the shortest term you can afford.
Save for A Down Payment
If you are thinking about buying a new or used car in the near future, saving for a down payment now can help you get the best car loan when you’re ready.
A down payment is the payment you make upfront toward the purchase of your new or used vehicle. You can use cash, the value of your trade-in vehicle, or both as a down payment. The size of your down payment can affect the terms of your loan, which is why it’s important to save for a down payment in advance.
The larger your down payment, the lower your monthly payments will be. A larger down payment may also help you qualify for a lower interest rate, which means you won’t pay as much in interest over the course of the loan.
Some experts recommend putting 20% of the purchase price down when taking out a car loan. But the average down payment on an auto loan is around 12% of the purchase price. You should never put down more than you can afford, but keep these figures in mind when deciding how much you should save for a down payment.
Keep Your Eye On the APR
You should carefully read all of the terms of your loan agreement, but it’s especially important to pay attention to the annual percentage rate, or APR. The APR is the annual cost of borrowing money from the lender, and it includes both interest and other fees. The APR is expressed as a percentage of the principal, which is the amount you are borrowing.
Do not confuse the APR with the interest rate. The interest rate represents the cost of interest, but it does not include other fees associated with borrowing money from the lender. For this reason, the APR is a more accurate representation of the total annual cost of the loan.
The APR you are offered can depend on many factors, including your credit history, length of your loan, and the size of your down payment.
Look at the APR to get an idea of how much the loan will cost you per year. The higher the APR, the more it will cost to borrow money. If you are comparing quotes, choosing the loan with a lower APR could lead to substantial long-term savings even if it’s a difference of one percentage point.
Consider Adding A Co-Signer
Sometimes, the best way to get more favorable terms is to add a co-signer to your loan. A co-signer is an individual who adds their name to your loan and agrees to repay the lender in the event you fail to do so. A co-signer can be anyone from a parent or sibling to close friend or colleague. However, the person you choose must be willing to take on the financial risk of serving as a co-signer.
Adding a co-signer to your loan might be helpful if you don’t have much of a credit history or if your credit history is poor. In either case, lenders might classify you as a high-risk borrower, which means you may only qualify for a car loan with a higher interest rate.
If your co-signer has good or excellent credit, adding their name to your loan might help you secure more favorable terms. Remember, even a slightly lower interest rate can save you a significant amount of money over the course of the loan.
Please note that adding a co-signer could also have some potential risks.
Choose the Right Lender
Choosing the right lender is just as important as choosing the right car loan. You can take out a car loan from a dealership, bank, credit union, or online lender. There are pros and cons to each of these options. But in general, here’s what you should look for when selecting a lender:
- Competitive rates: You shouldn’t choose a lender that is only willing to offer rates that are much higher than those offered by the competition.
- Easy application process: No lender should make you jump through hoops to submit an auto loan application. The application process should be quick and easy so you can buy your new or used car as soon as possible.
- Options: Look for a lender that allows you to choose the loan structure that meets your unique needs. This shows that the lender is committed to making sure you are satisfied with your loan.
- Excellent customer service: Don’t choose a lender that is hard to get in touch with or unwilling to answer your questions. Look for a lender that goes above and beyond for their customers.
These are some of the many qualities to search for when choosing a lender for your auto loan. If you’re ready to get pre-qualified for a car loan, you can contact LoanCenter at 1-877-624-7594 or fill out the form on our website.