Thinking about buying a new car but don’t have enough money to purchase one? A car loan might be the answer to your current situation. However, taking out a car loan is not a walk in the park… it’s a big decision that requires careful consideration.
What is a Car Loan?
A car loan is a type of loan that can help you borrow money to purchase the car you want. Moreover, the same car that you plan to purchase will be the collateral for the loan. That’s why, if you fail to pay for the loan, the lender can repossess the car.
A car loan is paid off in fixed monthly installments. Like a mortgage, the lender will retain ownership over the car until the final payment has been made. Local banks, credit unions, and even car dealers and manufacturers can help you get a car loan. Furthermore, you can also check for car loans available online, including other installment loans such as no credit check installment loans and personal loans for bad credit.
Factors that Determine Your Car Loan
If you are new to car loans, you might be wondering what factors will help determine your application’s outcome. Below are some factors you might want to consider:
Credit Score
Your credit score is one of the most vital factors that lenders review. Having a good credit score will definitely open up opportunities for the best car loan deals. It is essential to take note that a better credit score means more chances of approval with lower interest rates.
Your credit score shows how well you manage debts, that’s why lenders consider it the most when deciding whether to approve your loan or not. Moreover, lenders would always want to make sure that you can handle on-time payments concerning your car loan.
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Down Payment
The downpayment is the amount you are willing to pay upfront for the car you wanted. This reduces the amount you want to borrow. Suppose the car you wanted costs $30,000, and you made a downpayment of $10,000. This means that your loan principal (the amount you want to borrow) will be $20,000.
The bigger the down payment, the lesser the loan principal. Setting aside a 20% down payment is considered ideal in getting a car loan. If you don’t have good credit, putting down a bigger down payment can help you negotiate a better deal with the lender in terms of interest rates.
Loan Term
The loan term is how long you will have to pay the lender. Six years is a typical loan term for car loans. However, some lenders offer shorter or longer terms. If you choose a longer-term, that would mean you would end up with lower monthly payments. But that would also mean you will pay more in interest. Hence, applying for a shorter term will be a better deal for you.
Car You Want
If you plan to buy a used car, the loan principal will surely be lower since the vehicle’s price will also be lower. However, you can get a better interest rate if you want to purchase a new car. One of the few reasons behind that strategy is that it would be challenging for a lender to resell a used car if you fail to pay your debt. Many lenders would also want you to select an expensive new car to purchase to gain more interest.
How to Get the Best Car Loan
Proper planning will help you get the best deals that suit your budget. It is essential to know the following to improve your chances of getting the best car loan there is:
Set a Budget
Since you already know what determines your car loan, it is vital to set a budget. You wouldn’t want to see yourself getting a car loan that you can’t afford. Set a budget for the car you want, the down payment, and the loan principal. Always remember not to go over your budget.
Review Your Credit
As mentioned earlier, the credit score plays a huge factor in determining your car loan application status. You should check your credit and fix errors if there are any. Under the law, US consumers have the right to review their credit reports for free every year. Hence, exercise your rights and check your credit score immediately.
Look for the Right Lender
You should consult with multiple lenders concerning your plan to get a car loan. Different lenders will offer you different deals. You just need to look for the most practical deal you can afford.
Takeaway
Before getting a car loan, you should do your research first. You will also need to decide what type of car you want, your budget, and the most practical way to purchase it. Getting equipped with the proper knowledge will save you from future money problems.
