Many people need a vehicle to travel to work, school, or other places they frequently visit. But most people don’t have enough cash to pay for a new or used vehicle upfront. If you’re in this situation, a car loan might help.
Taking out a car loan allows you to borrow money from a lender to purchase a new or used vehicle. Using a car loan to buy a new or used vehicle is also referred to as “financing a car.” The process is simple, but if you’ve never taken out a car loan before, you may have a lot of questions about where to begin. Before you search for “car loans near me,” here’s what you should know about financing:
Determine Your Down Payment
If you are thinking about taking out an auto loan, you should determine your down payment before you apply.
A down payment is the payment you make upfront toward the cost of the car. You can make a down payment in cash, use the value of a trade-in vehicle as a down payment, or both.
If you plan on making a down payment in cash, figure out how much you can afford to put down. If you plan on using the value of a trade-in vehicle as a down payment, estimate how much you will get using an online vehicle valuation tool such as Kelley Blue Book.
Make sure you understand that the trade-in value is not the same as the value of your vehicle. A trade-in value is how much a dealer is willing to pay for your vehicle in order to resell it for a profit. Because they want to make a profit, the trade-in value is lower than the actual value of the vehicle.
Calculating how much you can afford to put down upfront is important because the size of your down payment can affect how much you are approved to borrow and your monthly payments.
Check Your Credit Score
Your vehicle is used as collateral for an auto loan, so you don’t need perfect credit to qualify. Even though a less-than-perfect credit score may not disqualify you, it could impact other terms of your auto loan.
For example, your credit score can affect the interest rate of your loan, which is the amount the lender charges you to borrow money. The lower your credit score, the more you might be charged in interest. Or in other words, the lower your credit score, the more it will cost you to borrow money to purchase a vehicle.
Because of this, you may want to check your credit score before applying for an auto loan. If it’s lower than you expected, consider spending a few months improving your score before taking out an auto loan. This may help you secure a lower interest rate and save a great deal of money.
If you spot an error on your credit report, contact the credit bureau right away. Getting errors removed from your credit report could drastically increase your score, which will make it easier to get a better interest rate on your auto loan.
Know What You Can Afford
Keep in mind that the amount you are approved to borrow is not necessarily the amount you can afford to borrow. For this reason, it’s wise to figure out how much you can afford to pay per month before applying for an auto loan.
Review your finances to determine how much you can comfortably spend on a monthly car payment so you don’t end up purchasing a vehicle you cannot afford. Factor in unexpected expenses that might arise at some point over the course of the loan.
In general, your monthly car payment should not be greater than your monthly income minus all of your expenses.
Get Familiar With Common Auto Loan Terms
It’s important to read your auto loan carefully to ensure you understand its terms before signing it. As you read the agreement, you might stumble upon a few auto loan terms that you’re not familiar with. Learning these terms is crucial to understanding your auto loan:
- Annual percentage rate, or APR: This is the annual cost of borrowing money from the lender, or in other words, the amount the lender charges you per year to borrow the money. The APR includes the cost of interest in addition to other fees. It is expressed as a percentage.
- Interest rate: The interest rate is often confused with the APR. Both the interest rate and APR are percentages that represent the annual cost of borrowing money. But the APR includes other fees associated with taking out the loan, whereas the interest rate does not. For this reason, the APR is a more accurate representation of the total annual cost of borrowing money.
- Term or duration: The loan term or duration refers to the length of time you will have to repay your loan. It is typically expressed in months, so if your loan term is three years, your agreement may state 36 months.
- Principal: This is the amount you are borrowing from the lender to purchase a new or used vehicle. The principal does not include fees, interest, and other costs associated with borrowing money.
- Total cost: This figure represents how much you will pay to the lender over the course of the loan. It includes the principal, interest, and other fees.
Become familiar with these terms so you understand your rights and responsibilities under your loan agreement.
Learn About Add-On Car Loan Features
During the pre-qualification process, the lender might ask if you want to include certain add-on features to your loan, including a GAP Waiver or Powertrain Coverage. Both of these add-on features are designed to protect you and your wallet, but they can increase your monthly payments, so it’s important to learn more before deciding if you should include them.
A GAP Waiver protects you if your car is stolen or badly damaged. It covers the difference between what your vehicle is worth, which is what your insurance company will pay out, and the amount you still owe on it. Having this type of coverage ensures that the outstanding balance on your auto loan can be paid off if your car is stolen or totaled.
Powertrain Coverage, on the other hand, covers the cost of repairing or replacing certain critical components that help the vehicle run. Having this type of coverage would save you money in the event these components need to be repaired or replaced.
Make sure you understand the available options so you can decide which features you want to add before finalizing your loan agreement.
You Should Get Pre-Qualified Before Shopping
If you’ve never taken out a car loan before, you might wonder whether you should find a car or apply for a loan first. It’s recommended that you get pre-qualified for a car loan before you start shopping for a new or used car.
Going through the pre-qualification process will tell you how much you are qualified to borrow to purchase a new or used car. You should know this figure before shopping for a car so you can determine which vehicles are within your budget. This way, you won’t waste time or deal with the heartbreak of falling in love with a vehicle you can’t afford. You can quickly narrow down your options and limit your focus to the vehicles within your budget.
Getting pre-qualified for an auto loan also strengthens your negotiating position, so you may be able to negotiate a lower price on a new or used vehicle.
It only takes a few minutes to get pre-qualified, so take the time to go through this quick process before you start shopping for a vehicle.
Understand Future Refinancing Options
You have the option of refinancing your auto loan in the future. Refinancing is the process of taking out a new auto loan to pay off your existing auto loan. What’s the point of replacing one auto loan with another? If your interest rate or monthly payment is high, refinancing your auto loan in the future could help you secure more favorable terms.
For example, say you are charged a high interest rate on your auto loan because of a poor credit history. If your credit score has improved since you took out this loan, you may qualify for a lower interest rate now. In this case, refinancing might allow you to replace your existing, high-interest loan with a more favorable, low-interest auto loan. Refinancing to lower your interest rate could save you a significant amount of money over the course of the loan.
You may not need to refinance your loan if you are satisfied with the terms. But it’s still helpful to know that this option is available in case you need it.
At this point, you should know enough to decide if a car loan is right for you. If you’re ready to apply, your search for “auto loans near me” is over. Call 1-877-624-7594 or fill out the form on our website to take the first step toward getting a car loan to purchase a new or used vehicle.