For the majority of Americans, buying a car is perhaps the second most expensive investment they will make in their lifetime after a home. That being said, it is rare for individuals to outright buy a vehicle in full. Instead, they often must apply for an auto loan and finance the vehicle by making monthly payments. These types of loans are among the most common type of loans in the United States and are typically easy to get approved for. However, there are many factors that you must know and consider before applying for a car loan. Below is a complete guide on applying for an auto loan.
How the Car Loan Process Works:
Determine Your Budget: Before you start looking at any cars, it is important that you do the math and set your budget. You will need to calculate how much money you can realistically, and comfortably make each month while considering the cost of insuring the car. Additionally, you must determine how long you would be willing to have this loan, also known as the loan terms, and determine how much money you’re planning to put down. After you have done this and set your budget, you will have a clear understanding of “how much car” you should be shopping for.
Check Your Credit Score: Before contacting any lenders or banks, you must know exactly what your credit score is. This is because hen determining an interest rate, lenders only look at your credit score and credit report. The higher your credit score, the more likely you are to get approved while enjoying a low-interest rate. This is because a high credit score generally indicates good creditworthiness, which means you are capable of making your payments on time.
Shop Around & Compare Loans: This is a vital step since loan terms, interest rates, and approval odds vary drastically from lender to lender. It is also important to borrow from a reputable bank or lender, with a low-interest rate.
Get Approved For the Loan: Before stepping into a showroom, you must get pre-approved. Not only will this show the dealer that you’re serious, but it will also allow you to possibly save some money. This is because dealerships will often have their expensive, enticing cars right in plain view as soon as a customer steps foot into a dealership. This is a sales-tactic that hopes for your emotions to get the best of you and your wallet. Getting pre-approved allows you to have a set budget, without the possibility of getting a vehicle that you probably can’t afford.
Shop For Your Next Car: you are now ready to shop for the exact car you want and can afford. Once you are set on a vehicle, you must let the lender know the make, model, and vehicle identification number, VIN, of the car. This is because the car will be in the loan holder’s name, but the car will technically be the property of the bank or lender. Additionally, you must consider the cost of insurance since most dealerships will need proof of insurance before letting you drive away.
Four Basics of Obtaining a Car Loan:
Down Payment: This is generally expressed in the form of a percentage of the loan’s total cost. Many people who apply for car loans are required by the lender, not legally, to have some money to put down before they are approved. This can also increase your approval odds, as well as lower your monthly payment.
Loan Cost: When you take out a car loan, there are two basic parts to it which are the principal and the interest. The actual cost of the car after a price is agreed upon by both parties is called the principal. The interest is hat you will be paying on top of the principal to the lender, usually a percentage of the loan amount.
Interest Rate: This is generally expressed as a percentage that is added to the cost of the loan. This is the price you must pay to the lender for letting you borrow the money to buy the vehicle.
Terms and Conditions: This refers to all of the other factors that make up the auto loan. For example, the terms and conditions will state the registration and insurance requirements, loan payoff terms, trade-in and selling terms, conditions regarding an accident or theft, maintenance requirements, and the conditions of repossession and loan default. Before signing these terms and conditions, a buyer has every right to fully, and carefully read them entirely, as well as have a clear understanding of what they are.
What Three Factors Affect Your Monthly Payment:
Loan Amount: Your monthly payment is based on the cost of the vehicle including tax, plus the interest or APR, divided by the number of months you want the loan to be. If you have a trade-in or make a reasonable down-payment towards the vehicle, your monthly payment will certainly decrease.
APR: Also known as the annual percentage rate, this is the interest amount that you will be required to pay the lender for lending you the money for the purchase. This is determined by your creditworthiness and your downpayment. In each state, there is a set limit on how much interest a lender or bank can legally charge you. Ideally, you want this rate to be as low as possible. Individuals with a good credit history often get charged between 2 and 4%, while those with poor credit history can be charged as much as 15%.
Term Length: This factor is often the most misleading when it comes to auto loans. This is because every borrower wants a low monthly payment. However, the only ways that you can accomplish this are by either putting more money down or extending the length of the loan. In the long-run, this ends up costing you more because you continue to pay interest each month when you make payments. Remember, each month when you make your monthly payment, only a portion of it goes towards the cost of the car, while the rest goes to the lender or bank as interest.
Unknown factors to consider:
You don’t technically own the car, the lender does. They also hold the title to the vehicle until the loan is completely paid off.
You will have to purchase full-coverage for your vehicle because it is still property the lender. Once you have completely paid the loan off and received the title, you can insure the car under any policy.
The more money you pay each month, the more you will save. This is because you incur a monthly interest charge each month, and if you make a payment that is more than the minimum requirement, you will ultimately have the loan out for fewer months.
You don’t make payments to the dealer, you make them to the bank or lender. The dealership is paid for the vehicle immediately by the bank or lender when you finance a car.