Are you planning on taking out your first car loan?
Taking ownership of your first new car is a huge and exciting step. The freedom a car provides is life-changing and you won’t want to go back. If it’s your first time applying for auto financing, the process can be daunting, however.
Don’t worry, we’re here to help! Read on to learn everything you need to know about taking out a car loan and avoiding bad debt.
Sort Your Finances Out
Before you start to look for auto financing, make sure you have your finances sorted out. Know what your budget is (and be realistic), as you don’t want to end up in a long-term loan you struggle to pay back. Or worse, end up defaulting on.
You can use an online auto finance calculator to work out what you’ll be able to afford in repayments each month. Check your credit accounts for any reporting inaccuracies. Your credit score and report will be a big deciding factor on the amount of car finance interest rates you’ll need to pay.
Call around an auto finance center and other auto finance providers. Find out what credit bureau they’re using when they make their credit checks. This way, you can use the same one and check your report for any errors. Any that you do find, you can fix before you even apply for auto financing.
It’s important to fix any errors as they can harm your credit score. A bad score will put you at a big disadvantage when applying for any loan, not only one for a car. It lessens your negotiating power and could force you into a much higher rate.
Know What You’re After and What That’ll Cost
Once you have sorted your finances, you need to work out what you want/need in a car. You don’t want to overborrow, so work out what the car you need will cost beforehand.
You should have worked out your budget already, so look around and do your research. It’ll give you an idea of what sort of car you’d be able to afford.
Be wary of salespeople though, it’s their job to get you to spend as much as possible. The more you spend, the larger the loan you’ll need, and the higher the auto finance rates. This means you’ll pay more interest on it.
If you’re armed with knowledge, you can stand your ground as you know what you can spend and what the car is worth. It’s a good idea to find out what other local dealerships charge for the same car, so you can haggle on a better deal.
Let the dealership know you’re shopping around too. They’ll have more incentive to negotiate, as they’ll want your business. They’ll know you’ll go for a competitor if they don’t give you a reason not to.
Have a Down Payment
You might be able to afford to borrow the full price of a car, but it doesn’t mean you should. In fact, in most cases, it makes more sense to save up a down payment.
Downpayments will put you at an advantage when negotiating your auto finance rates. It can also shorten the loan term, which will save you money in the long term.
Again, an online calculator will help here. See how the numbers change when you start adding in a downpayment. The less you need to borrow, the less you’re paying out in the long run. That’s more money you can put towards something else to better your future.
Get Quotes From Banks & Credit Unions
Don’t assume that the dealer will give you the best financing rates. Before you ask the dealer, check with a bank or credit union for a quote instead.
Not only does this help with your budget, but it also gives you purchasing power. You can negotiate for a better deal, even if the dealer’s quote is in line with the bank or credit union. Dealer financing still usually involves a credit union or bank. The difference is it’s the dealer submitting your information, not you.
In some instances, the dealer then marks up the interest rates. Then, the bank and dealer split the excess 50-50. You could end up paying higher interest rates than if you’d applied yourself to the lender directly.
By going to a financial institution first, you gain knowledge of what’s available. If a dealer wants to finance you, you can then force them to match the offer you have already. It means they can’t steer you to a different agreement where you lose out.
Don’t Get Trapped in the Monthly Payment Scheme
You want to find out what monthly payments you can afford, but don’t get into it with the dealer. With them, focus on the total price of the car.
If a salesperson can get you to commit to your monthly payment target, they’ll focus on something else. Like how long the loan term will last. In this case, you’ll meet your monthly payment target sure, but you’ll pay the loan back for longer. Over the long-term, the interest alone could see you spending way more money than you should have.
Work out what you can pay each month, over a term length you’re happy with. Do this before you go to view cars. With this knowledge, pick a car that has an all-in full price that will fit within those targets.
It’s ok to take your time, this is a big decision. Don’t feel pressured or rush into anything because of a pushy salesperson. If you don’t feel comfortable alone, bring a friend or family member with you. It’s even better if they’ve negotiated a car loan before.
Use a Cosigner
For first-time auto loans, it’s common for people not to have the best credit scores. People often find themselves lacking enough credit to get the best rates. This forces them into unacceptable, high-interest rate loan terms.
When you’re factoring in your budget, remember you have other costs to consider. Things like insurance, for example, also need paying for. Insurance will also likely end up higher if you don’t have a good score or much of a credit history.
Do your research, work out all the costs, and then consider asking a close friend or family member to cosign. If you have a cosigner with good credit, they can help lower the interest rates.
It should be someone you trust and who trusts you, and you must be sure of what you can afford. If you can’t make a repayment, your consigner will be responsible for making your payments. If you make all your payments on time, you’ll build your credit score for a more stable financial future.
Refinancing in the Future
After a few years, you might qualify for lower auto interest rates than your current deal. If you pay on time for a few years, your credit score will increase. You can consider refinancing.
But, be careful about making this decision. As you would shop around for the best auto loan rates, you should do the same here. Check with a few auto financing institutes for some new quotes.
With refinancing, you want to beware of any quotes that extend your loan term. If you’ve only got two or three years left, it’s not wise to refinance to a five-year loan term. Only refinance what you have remaining.
This way, you can save money on the interest rates, but you’ll still get rid of the loan in the same length of time. With a good credit score, you’re in a more powerful position. Tell the institutes you’re shopping around for more chance at a bargain deal.
Negotiate
With over $1 trillion outstanding debts, the auto loan industry is huge. Instead of being a nameless number, think about how you can use this to be the winner.
Understand the auto financing process through research, so you know what to expect. When you know where you stand, you can expect and avoid any issues that could come up.
You can fix errors on your credit score, and shop around for the best deals. You can also call out lenders and show them they can’t push you around. Negotiations will go smoother, saving you time, stress, and money in the long run.
To make sure your credit score is good enough, make use of the free annual Credit Report you can get. It’ll give you an easy-to-read credit report so you know where you stand, right from the start.
Auto Financing the Easy Way
There you have it! Now you’ve read this guide to auto financing you’re on your way to success.
It’s easy to feel overwhelmed but remember you’re the one with the power in this situation. If you do your research, prepare your finances, and shop around, you’re in the driving seat.
Take your time, don’t let anyone pressure you and you’ll be sure to find the perfect deal to suit your needs. It will get you on the road to more freedom and a better future.
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