Many first-time buyers get an auto loan to help them finance their purchase. There are several benefits to using a loan to buy a new vehicle. First, it allows you to pay a smaller, more manageable amount every month until the loan is paid off. This will help you with budgeting for the rest of your payments. Second, it will allow you to buy a larger vehicle. Finally, getting an auto loan and paying it off responsibly will help you establish or improve your credit score.
However, for people new to the world of auto loans, it can be confusing. You want to make sure you get the best loan for your needs too big of a loan will be difficult to pay, and too small of a loan can hold you back from getting the vehicle you need.
Check your credit
According to Credit.com, your first step to getting an auto loan - or any loan - is to check your credit [1]. A good credit score will give you a better chance to get a low interest rate. Bad credit may disqualify you from certain loans or result in a higher interest rate. Check your credit report at Experian, Equifax or TransUnion to find out where you stand. It's also a good idea to check your report to see if there are any errors that are bringing down your score. If there are, be sure to get them cleared before applying for loans.
Budgeting your purchase
After you check your credit score, you'll need to determine how much you can afford. Take a close look at your current finances, beginning with the amount you make each month. Calculate what necessary expenses are costing you every month, including housing, utilities, groceries and any debt you're paying off. Then, determine how much more you can afford every month. Don't forget about vehicle costs outside of the loan:
- Insurance
- Gas
- Registration
- Regular maintenance, like oil changes
- Parking
Knowing how much you are able to pay each month will help you determine what kind of loan you want. Vehicle loans are usually available in terms of three, four, five or six years. The longer your term is, the lower the monthly payment will be. However, if you draw the loan out for six years, as opposed to three, you will be paying interest for three extra years.
Plus, if your car winds up stolen or damaged during the course of the loan, you could find yourself in a situation where the amount you still have to pay is higher than the amount your insurance company will give you for the loss, Bankrate explained [2]. Gap insurance exists to help customers in instances like this, but it is less likely to occur if you choose a shorter term.
Find a good loan
Once you figure out how much you can afford, shop around for a good loan. Bankrate noted many people wind up accepting rates offered at the dealership, which are typically more expensive than they could have found elsewhere. Getting preapproved can help combat this. Not only will you have the opportunity for a more reasonable loan, but you can also use the rate you were offered as a benchmark for negotiation.
"It gives you a bargaining chip and it helps keep things simple during negotiation," explained Joanne Helperin, a senior features editor at Edmunds, according to Bankrate. "You can say, 'I've got this, try to beat it.'"
Once you have the best loan and the vehicle to fit your lifestyle, you will begin paying off the purchase. Be sure to stick to the budget you planned ahead of time. Falling behind on your vehicle loan payments can negatively affect your credit score.
Sources:
[1]. How to Get a Car Loan
[2]. Getting the first car loan
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