Getting a car drastically improves you life, but don’t get too antsy about buying one. Think about it first. Here’s how to finance a car the right way.
Nearly 43 percent of Americans — 107 million people — currently owe money on a car. Are you interested in applying for an auto loan?
Clearly, auto loans are common in the United States. However, there are definitely good and bad ways to go about getting a car.
If you want to keep your credit score high and ensure you can repay your auto loan in a reasonable amount of time, keep reading.
Explained below are some important guidelines that will help you learn how to finance a car in a responsible way.
Know Your Credit Score
The first step you need to take when looking to finance a car is to figure out your credit score. Even if you’re going to try and apply for a no credit check loan, it’s still a good idea to know where you stand.
Your bank or credit union should be able to tell you your credit score. You can also request a free copy of your credit report from the Federal Trade Commission. This is the best option if you want to get a thorough look at your credit.
When you’re looking at your credit score, look beyond the credit score and pay attention to the details that make up that score.
Check to see if there are any errors that are bringing your score down. Errors might include misspellings or old accounts that should have been closed.
If you notice any errors, get them corrected as soon as possible to see if they help improve your score. Even if they don’t, it’s still a good idea to make sure your credit report is fully accurate.
It’s also a good idea to get pre-approved from a lender before you go and start shopping for cars.
This helps you get an idea of how much you can borrow and at what interest rate. You can also use the pre-approval amount as a bargaining chip when you’re talking to the dealer.
It’s a good idea for anyone who’s looking to buy a car to get pre-approved, but it’s especially beneficial for those who have subpar credit ratings.
If you’re having a hard time getting pre-approved for a loan from a traditional lender, consider looking into an online lender.
Online lenders tend to have better terms and interest rates associated with their loans. They also make it easy for you to compare rates and amounts and ensure you’re getting the best option possible.
Keep the Term Short
The shorter your loan term is, the better. Yes, a shorter term will mean higher monthly payments. But, it will also save you from paying a ton of extra money in interest.
Keep in mind, too, that lenders will often charge higher interest rates if you decide to extend the term of your loan. This, in turn, ends up costing you more money farther down the road.
Keep the term as short as you can afford.
Remember, if you can’t afford the payments for a car and are trying to stretch out the loan term to make the payment fit your budget more comfortably, you might need to consider downgrading to something that’s smaller or more affordable.
Make a Down Payment
Often, dealerships will give you the option to finance a car without putting any money down.
This might seem like a great idea initially. After all, you don’t have to pay any money that day and you get to drive away with a new car. What could be better?
If you don’t make a down payment when you buy the car, you’ll end up with higher monthly payments. A significant downpayment — such as 10-20 percent — could help to lower the total cost of the car by quite a bit.
This can be a great option if you’re having a hard time getting financing for the car you want, or if you just want to get a lower monthly payment.
Don’t Finance the “Extras”
Often, dealerships will offer to bundle the extra costs of buying a car — sales tax, registration fees, warranties, etc. — in with the total amount of your car loan.
This might seem like a good option initially, especially if you’re buying a luxury car and have added a lot of things on to the package.
But, in reality, this just adds to the total cost of your car, meaning you’ll be paying more money each month as a result. These extra costs also don’t add anything to the value of your car.
Instead of financing these extras, pay cash for them. This will help to keep your monthly payment as low as possible.
Consider a Co-Signer
If you’ve been turned down for a car loan, figure out what it was that caused you to get denied.
Don’t just run out and start applying for more loans. Having tons of loan applications on your credit report will have a negative effect on your score and make it even harder for you to get approved for loans.
If your credit score is holding you back, consider asking someone with a good credit score to co-sign your loan.
If they do this, they will agree to take over the loan payments if you default. Their credit score will also be negatively affected if you can’t make the payments.
Obviously, co-signing a loan is a big responsibility. It can be challenging to find someone who’s willing to take on this responsibility.
If you can make a good case for yourself, though, it’s a great option for boosting your credit score and getting better loan terms and interest rates.
Now that You Know How to Finance a Car
As you can see, the process of figuring out how to finance a car in a responsible way isn’t as challenging as you might have initially thought.
With a little planning, you can get a car loan that allows you to hit the open road without requiring your credit score to take a hit.
Think the cost of owning a car is limited to the car payment? Think again.
There are a lot of other payments you’ll need to make to keep your car up and running, including insurance premiums.
Be sure to check out this article for tips on how to save money on car insurance.