If you’ve decided it’s time to purchase a vehicle, the best thing you can do beforehand is to educate yourself on the process. Here are some Auto Loan Basics to help you get started.
Determine a Budget
First you need to know how much you can afford to spend and what your down payment will be. Traditionally, 20 percent was thought to be a suitable down payment for a new car, and about 10 percent for a used vehicle. However, it depends on how much you can afford. According to Edmunds.com, the general rule is that for every $1,000 you put down, your monthly payment will drop by $20. To see how various down payments will affect your monthly payment, use the Edmunds calculators. The bottom line is, put down as much as you can afford. If you will be trading in a vehicle, visit a few dealerships and ask for a trade-in quote. Also, check Kelley Blue Book, which provides approximate values for pre-owned vehicles.
In order to purchase a car, you will most likely need to borrow money. Most people borrow from a bank, a credit union, a dealership or through an on-line only lender. Complete several applications, be completely honest when answering the questions (all information will be verified!), and see which one offers you the best loan and terms for your circumstances.
Remember, in order to borrow money, you will have to pay interest to the lender, in addition to the principal. You will be required to pay the money back to the lender in monthly installments until it is completely paid-off. As you shop around, it’s important to understand that interest rates, also known as Annual Percentage Rate (or APR) can vary. Your credit rating, price of the vehicle, length of the loan and your geographic location will determine your interest rate. For example, the shorter the length of the loan, the lower the interest rate and, conversely, the longer the loan, the higher the interest rate.
Your credit rating is important; as it impacts the interest rate you will be charged, as stated above. The higher your credit score, the lower the interest rate you will be charged. So, you should know what your credit score is prior to applying for a car loan. According to U.S. News and World Report, those with a credit rating 720 and above receive the best interest rates. You can check your credit scores through bureau’s like FICO, TransUnion, Experian and Equifax. You should also check this information to ensure its accuracy, and to verify there is no fraudulent activity on your record. If your rating is poor, click here for tips from Experian on how to improve it. If your FICO score is 620 or below, you will increase the chances of getting approved for a loan if you put down a large down payment.
If you have good credit, it’s to your advantage to get pre-approved for a loan before you walk into a dealership. This gives you the upper hand, and a choice as to whether to accept or reject the dealership’s financing.
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