You might be surprised to find out the average new car costs approximately $48,000. Under most circumstances, buyers will need an auto loan to afford a vehicle. This is often true even if they purchase a used car.
At first glance, browsing through financing options can seem overwhelming. With so many car loans available, some people worry it will be impossible to choose the right one.
The good news is it’s not nearly as intimidating as it seems. We’ve put together a brief guide that has the information you need to know about car loans. Let’s look at the info that can help you start on the right track.
Understand Loan Eligibility
Not everybody will be equally eligible for the same auto loan. One of the most significant factors at play is your credit score. This is used as a metric to determine your financial reliability to pay back debt.
The higher your score, the more trustworthy you are. If you have a low score, you might be stuck with high interest rates.
You may also be limited on the total amount of money you can borrow. Some dealers will consider your loan history in addition to your credit history.
If you’ve never taken out a loan before (such as for a car or a house), you may not be eligible for certain types of financing. If you can’t find suitable loan terms, consider taking time to improve your eligibility. This could involve paying off existing debt or raising your credit score.
Research Loan Cost
The overall cost of the loan will be far more than was advertised. This is an undeniable fact you must consider.
To elaborate, let’s assume you borrowed $25,000 to purchase a used vehicle. Your interest rate is 8% due to having a lukewarm credit score and no loan history.
Regardless of how long your loan term is, you’ll pay thousands of dollars in interest by the time you pay off what you borrow. This number can greatly fluctuate depending on factors like the amount of money put down, dealership fees, and sales tax.
It’s imperative to have a comprehensive understanding of how much the loan will cost you before you borrow money. Keep in mind that having a large balance will also impact your ability to secure other forms of financing. Some people get denied mortgage loans due to owing too much money on their car.
You should also consider the figurative cost of your auto loan. If obtaining financing requires you to get less sleep and work longer hours, it might not be the best choice at this point in your life.
Look for Low Interest Rates
The lower the interest rate you can find, the better. In some cases, you can save thousands of dollars by finding an interest rate that differs by a few percent.
Unfortunately, interest rates are dictated by factors outside of your control. One of the most common is inflation. Supply and demand will also influence how much you pay in interest.
There may be situations where you can’t find a reasonable rate no matter where you search. In scenarios like these, it might be better to wait a few months to see if interest rates improve. This will likely help you find a better opportunity.
Decide the Length of Your Loan
In general, longer loans will cost you more money. This is because you’ll spend more time paying interest, allowing it to accumulate. If possible, it’s best to choose short loan terms.
This will require you to make a large monthly payment, but you’ll pay less money overall. Most loans are between 36 and 84 months.
In rare cases, you could find a loan that exceeds 100 months. You should only choose a long-term where you’re comfortable making car payments during the duration.
To clarify, let’s assume you choose a 60-month loan term. You will need to make monthly car payments for five consecutive years. Depending on your financial situation, this could present complications.
Don’t Overreach
This is one of the most important tips to keep in mind. Many people make the mistake of securing financing that they can’t reasonably afford to pay back.
For example, let’s assume you make $4,000 per month after taxes. Between your living expenses and existing debt repayment, you spend approximately $3,500 per month. You’re interested in an auto financing option that would require you to pay $500 per month toward your car loan.
While you can technically afford this, all it takes is one contingency to make it impossible to pay this amount. People in situations like these should find ways to increase their income or cut costs.
Keep this in mind moving forward so you don’t experience financial strain. Otherwise, you risk causing unnecessary stress. A common scenario is having to pay other bills late so you can make your car payment on time.
Consider Refinancing in the Future
There’s nothing wrong with accepting suboptimal loan terms as long as you plan to refinance in the future. The auto loan refinance process works by securing money from a separate lender and using that cash to pay off your existing car.
You will then make repayments to your new lender. The main enticement of refinancing is that your new lender will offer a lower interest rate.
It’s worth noting that your new lender will hold ownership of the vehicle title until you finish paying them back. This is to prevent people from defaulting on their new loans.
You’ll need to perform the same amount of research when refinancing as you did when securing your initial auto loan. This will help you find the best auto refinance deal available for your situation.
Choose Car Loans Carefully
While car loans are typically for much less money than a mortgage, this doesn’t mean you should treat them with less care. The information in this guide will help ensure you understand auto financing options and narrow down your choices.
From here, you’ll be one step closer to hitting the road in a new vehicle. Looking for other lifestyle articles that can help you out in the future? Be sure to check out the rest of our blog for more info!
