The purchase of a new car is a huge investment. Although some individuals have the funds to purchase a vehicle with cash, others need to take out loans. Overall, 35% of adults rely on this form of payment. Here are the facts on getting a car loan for your family or yourself if you need to go this route this year.
It’s A Secured Loan
Car financing is considered a secure loan. In this form of borrowing, lenders can take possession of a lender’s assets when they don’t make payments. In an auto loan, this includes repossession of your vehicle. Some companies provide unsecured auto loans. However, they compensate for the lack of security with higher interest rates and payments. Although this loan type could work for people with bad credit, it may not be worth the return on investment for car ownership. It all depends on the situation so make sure you ask an expert before pulling the trigger on any type of financial decision for your car.
Good Credit Equals Better Benefits
Generally, you can obtain an auto loan with below-average credit. However, you don’t receive the benefits that go along with it. These are lower interest rates and better payment terms. Conversely, you receive those advantages if you have a strong credit rating. Those with scores of 700 or above may qualify for incentives like zero down payment. So, it’s in your best interest to keep your credit clean. Pay your other bills on time. If you have debts sent to creditors, try to find ways to send them a one-time payoff to close the account.
Learn About Loan Servicing Options
Learn about car loan servicing options as you move through the buying process. The term refers to the administrative aspects of financing a vehicle. It starts when the borrower signs a loan agreement and ends at the final payment. In-between are items to consider. You need to know how to get a refund if you accidentally make two payments in one month. If you stop making payments for some reason, you need to know about the company’s charge-off and repossession policies. Needless to say, don’t go blindly into a finance agreement.
Your Debt And Income Matter
Another item auto financiers examine is your debt to income (DTI) ratio. What you make should be twice as much as your debt. A positive DTI signals a loan company that you’re a low-risk customer. In contrast, you’re considered a medium to a high-risk applicant if what you owe is more than your revenue. Even if you qualify, you’re denied better offers. So, make sure to review your balance sheet before you shop for a car and a loan.
Shorter Terms Are Better
The average auto loan consists of five years (60 months) of payments. On the surface, this seems like a good idea. It keeps monthly costs low for the lender. Yet, it’s not the best deal. A five-year plan results in you paying more toward interest than the principal. The situation shifts as you near the loan’s end. It would be better to accept short-term funding to even things out. It doesn’t mean you should take out a 12-month loan. Go with a two or three-year program. Though your payments are slightly higher, you’ll have full ownership of the car in a shorter period.
You Shop For A Loan And A Car
Avoid purchasing the car and the financing at one location. In other words, shop for auto loans with better interest rates and payment terms. If you don’t, you could end up paying more for both. Try to get pre-approval for a car loan. The practice is done with mortgages to determine how much home you can afford. A car loan pre-approval helps you focus on a price range that fits your budget for your used car you are looking to purchase.
Down Payments and Trade-Ins Help
One way to lower the total auto loan amount is to make a down payment or trade in your current car. The former method might be tough to swallow. However, it’s a positive return on investment and a show of good faith to the finance company. A trade-in is easier on your wallet. Here, the dealership takes its current value and deducts it from the new vehicle’s overall cost. Therefore, the loan’s value is also lower. This can be a great option for any family looking to buy another vehicle.
Conclusion for Getting a Car Loan
There’s a good deal you should know about getting a car loan for your family. Use the information above and other articles online when you’re ready to take the plunge. If you take your time, do your research, and make smart decisions then you will be able to drive away in the car of your dreams. Don’t be afraid to ask questions in order to get to that point!
