Without a doubt, buying a car is a considerable investment and a necessity. Not only does it give you freedom of movement, but it also facilitates your daily tasks.
While some people wait many years to get a car, others prefer to quicken the process by taking out a loan. There are more than 100 million auto loans accounts in the U.S.
Many factors come into play when getting a car loan. Here are some of the things to keep in mind.
The interest rate of a loan is the cost of borrowing. Keeping in mind that interest rates are bound to change over time due to market movements, it’s essential to know how much your lender charges for the auto loan.
Interest rates also depend on personal details such as region, car price, loan term, credit score, car category, model, down payment, and loan term. To get a favorable interest rate, shop around and compare different offers.
Another question to ask your lender is whether the interest rate is fixed or floating. The interest remains the same for a fixed rate regardless of loan balance or term. These loans are more pricey and not recommended for long-term loan facilities.
On the other hand, a floating interest rate changes over time and is calculated based on the outstanding loan balance.
During your auto loan application, your lender should disclose all the terms, including interest, fees, and loan tenure.
Most auto loans last between 12 and 36 months because a vehicle’s value typically declines due to depreciation. It’s unusual to find a lender granting many years to repay an auto loan, not unless the car is a luxury vehicle with a high value or heavy-duty cars like tractors and trailers.
Whatever the case, knowing about the loan term and how it affects your overall repayment is essential.
A longer term may have shorter monthly installments; however, the overall interest will be high. On the other hand, a short term may have higher installments, but with the overall interest low.
A credit score is a number, mostly ranging between 300 to 900, that depicts your creditworthiness. It’s one of the main factors that lenders use to appraise your loan request.
Usually, a lender will not proceed with the application if the score is too low or poor.
In the past, knowing the factors that led to a decline or approval of a loan was not easy. Luckily, this information is available everywhere with digitization and you can get your credit score through a simple web search.
You can save time by knowing your credit score before submitting a loan request. There are three credit reference bureaus in the U.S.: Equifax, Experian, and TransUnion.
Further, you can get up to six free credit reports through the annualceditreport.com website or by calling the service.
The advantage of a credit report is that it’s a comprehensive analysis of all credit card accounts, history of payment, loan accounts, or open current accounts you may have. It also shows the bills you’ve missed to pay on time and how late they are.
If your credit score is substantially low, you can take the following steps to improve it:
- Close open current accounts that may be attracting interest and charges.
- Maintain only one credit card to avoid over-borrowing. Besides, having many credit cards portrays you as a heavily indebted borrower.
- Enable reminders on your phone or calendar for bill payments.
- Consolidate many loans into a single manageable installment.
If you can’t salvage your situation at the moment, borrow from lenders that offer loans with bad credit.
You may be asked for a downpayment for auto loans to support your application. Additionally, your lender will likely require a money transfer to the car seller and use the title as security.
In cases of joint asset ownership with the lender, the title reverts to you when you finish paying the loan.
The main disadvantage of a loan with bad credit is that your lender may impose a fixed rate of interest on the loan, thereby increasing the cost of borrowing. Also, the repayment period may be shorter and monthly installments higher.
Your Ability To Pay
Your ability to pay is demonstrated by your sources of income. Some people may have a high income to enable them to take out huge loans.
A question may arise, “how many car loans can you have at a time?”
There’s no limit, as long as you can demonstrate your ability to pay. However, it’s not recommended because it can increase your debt burden.
Besides the interest rate, auto lenders also impose certain fees on car loans. The most common are the processing fees, which depend on the amount applied. It can be a certain percentage, starting from 1%.
Also, there are other charges you need to be aware of, such as valuation charges, attorney fees, late payment fees, and early loan settlement charges.
Choose a lender that offers the lowest charges, as this will reduce the overall cost of borrowing.
When you apply for a car loan, you want the process to be seamless and less stressful. A car loan application differs from an online payday loan because the process involves submitting requisite documents.
With digital banking, you can apply for a loan online and avail your documents online. You may get money into the account within minutes if the documents are in order.
Suppose your credit score is good and you’re borrowing against other sources of income such as business or salary. Your application may be approved quickly without considering the purpose of borrowing. Once you get the money in your account, you’re at liberty to decide how you want to use it.
If you want the bank to fund the purchase, it can take a few days to approve the loan. The process may involve engaging with other parties such as car valuers, motor vehicle dealers, and attorneys for drawing up contracts.
Read the Offer Letter Carefully, Understand the Terms
Upon approval, your lender will draw up a contract that binds both parties. In the letter, you’ll find the amount approved, the nature of the collateral, loan tenure, interest rate, and any fees charged.
Other items such as your name, residence, place of work, nature of business, and date will be on the offer letter. It’s essential to read the terms of the loan carefully to avoid surprises along the way.
Scrutinize every detail and check if there are hidden charges sneaked into the contract. Ask your lender to clarify any clauses that may sound unfamiliar.
A car loan is meant to meet your needs like any other loan facility. However, don’t be in a hurry to sign up for the contract before keeping in mind the issues explained in this text. Remember to compare different lenders before deciding on the one with great offers.