Other expenses also need cash, say saving for a property, student debt, college fund, or setting up an emergency fund. Factor in all such costs before signing a loan contract.
A car is an expensive purchase, especially if using an auto loan to finance it. Car loans can weigh on your finances, hence the need to follow due diligence before signing the papers. A little research about the prevailing interest rates and financial institutions offering the best terms on car loans goes a long way in making informed decisions. Here are essential factors you should consider before applying for the auto loan:
1. Check the Interest Rate
Compare the interest rates from different financial institutions before signing the loan contract. There are no standard interest rates for auto loans in the market, so you want to shop around to find one that suits your budget.
Factors like your credit score and the type of car you want do affect the interest rate charged on loans. Buyers with a credit score of 655 and are purchasing a used car or 719 and are buying a new vehicle qualify for a lower interest rates. Borrowers with a credit score lower than 500 are more likely to find lenders charging higher interest rates.
Similarly, buyers applying for an auto loan to purchase a new vehicle may have their loans charged a low interest compared to those buying used cars. This is because lenders find new cars less risky (not prone to break down), and they can quickly determine the amount of depreciation over time. Additionally, new vehicles have an expected resale value.
2. Additional Expenditure
You want to purchase a new car, which is pretty fine given your recent raise. However, other expenses also need cash, say saving for a property, student debt, college fund, or setting up an emergency fund. Factor in all such costs before signing a loan contract. Financial planning tools found online like Nova Scotia auto finance calculator should help crunch those numbers fast.
Also, consider how much you have saved for the down payment and the amount you can set aside for monthly loan repayments. If you have saved enough, then your monthly loan repayments may reduce significantly.
Be wary of developing an upside loan. It is an increasing problem among borrowers who opt for trade-ins. They end up spending more on the auto loan than the value of the vehicle as a result of lengthy loan repayment periods, high interest rates, and buying cars that depreciate rapidly.
If trading in a car and you already have an existing loan, ask the lender to explain its impact on your current monthly payments. This is because the remaining balance can lead to an increase in developing negative equity. Alternatively, pay for the down payment upfront.
3. Check Your Credit Score
As earlier highlighted, your credit score affects the interest rate charged. It also determines whether you qualify for special offers like cash back from manufacturers. Borrowers are entitled to credit reports every year from each of the credit reporting bureau (TransUnion, Equifax, and Experian). Report any erroneous figures to the credit company before presenting the report to the lender. This is because lenders use the reports to determine if you are a credit risk. Paying off a previous auto loan early may help your credit rating.
4. Whether to Apply for an Auto Loan from a Bank Dealer or a Car Dealer
Car dealerships also provide auto loans. You only need to provide personal details which the dealer forwards to the different auto lenders. If one of them chooses to finance the loan, he will quote a buy rate to the dealer. Be sure to negotiate the rate as dealers are allowed to charge a higher rate than the buy rate.
Banks are a better option for buyers looking to compare financing options. Also, banks can pre-approve the borrower for a loan. The only downside of applying for an auto loan with a bank is that you need to visit different banks to find one that charges the best rates. Compare the financial packages offered by both institutions before signing the contract.
The points discussed should help make an informed decision when signing an auto loan. Keep in mind your decision will impact your lifestyle in the long-run. As such, you don’t want to get cash-strapped every month due to high monthly loan repayments. If you have a good credit score, negotiate the interest rate.