Choosing a car is the easy part but trying to find a good deal can be stressful. Car dealers and financial lenders are ultimately interested in making as much profit as possible, and if you aren't well-informed about the financial aspect, you can end up over your head in debt. Here is what you need to know about auto loans.
What Is an Auto Loan and Why Might You Need One?
When you want to purchase a vehicle but don't have the means or desire to pay for it upfront, you apply for an auto loan. If the car finance company or lender deems you as a reliable party, they will purchase the vehicle and allow you to make pay them back in installments. The payments are usually due on a monthly basis and include an interest rate selected by the finance company. This type of loan allows the vehicle of interest to be held as collateral just in case the loanee fails to keep current on their payments.
What Qualifications Are Needed to Get A Car Loan?
Whether are not you are approved for a loan is entirely up to the financial institution. While some companies are a bit more lenient than others, most require the loanee to have a steady income and plausible credit. If the lending establishment doesn't feel comfortable extending the loan, they will either deny the application or request for a cosigner. A cosigner is a party who will agree to take over the loan payments if the loanee shows to be irresponsible down the line.
What Factors Make Up Your Financing Terms?
Your financing terms are determined by four distinct factors: the loan amount, the interest rate (also referred to as APR or annual percentage rate), and the loan term (how long you have to pay the loan back). While the loan amount usually matches the price of the vehicle, the APR is determined by the financial institution as this is how they make a profit. Lenders may allow you to select your own loan term (usually 36-72 months), but the longer you take to pay your debt off, the more interest you will acquire.
Tips on Getting the Best Auto Loan
Your credit score is the first factor a lender will consider when reviewing your application. A high score makes you appear more credible, so you will have a better chance of getting approved and receiving lower interest rates. If your credit score isn't up to par, try finding a co-signer. Lenders feel more comfortable extending a loan when a co-signer is involved because the debt can be transferred if the loanee fails to maintain financial responsibility. Also, strongly consider the down payment amount (the amount you pay upfront). Your initial payment subtracts from your overall loan debt and allows for lower installments.
Being aware of how auto loans work can help you save loads of cash in the long run. Just remember to carefully review your financing terms, and always apply to multiple lenders to ensure that you are getting the best deal possible.