What to Look for in an Auto Loan

Man with AutomobileBuying a new car can be an exciting and exhilarating experience. There are few things finer than holding the keys to your new car for the first time and listening to the roar of the engine as you start up. Unfortunately, this experience can be dampened by the need of acquiring funding for the purchase of your new vehicle and the seemingly endless array of hoops you feel you have to jump through. But that doesn’t have to be the case. Today we are going to give you the information you need to help you understand what to look for in an auto loan.

1. Do Your Budget Homework

Before you begin searching for an auto loan it is important that you know exactly how much you can spend. This step may seem extremely basic but you’d be surprised how many people ignore this step and end up purchasing a vehicle that is beyond their financial means. Gather together all of your income in your favorite money management tool and you will get a basic overview of how much you can spend each month. This is also a good time to figure out how much you can spend on a down payment for the vehicle. Knowing these figures beforehand will give you the tools you need to make the best decision possible.

2. Managing Your Credit

After you have set up a budget it is now a good time to find out about your credit situation. Credit reports are available for free to any US citizen so you should be sure to secure your copy and scan it for any potential problems such as credit mistakes or bad credit flags. When securing your credit report be sure that you obtain a copy from all three credit agencies. These three agencies are Experian, Equifax and TransUnion. All lenders use at least one of these credit reports, if not all three of them, so it is in your best interest to make sure you get the best loan possible.

3. The Search For Lenders

Many consumers choose to get an auto loan from the dealer and don’t give it a second thought. While this can be a convenient way to secure your car loan it is usually in your best interest to shop around a little bit. Auto loans secured through the car dealership are usually more expensive than loans secured from other sources. Check around with several banks or credit unions and find the the lender that offers you the best interest rates and terms. In many cases, you can have you auto loan approved before you even hit the showroom of the dealership and this can really improve your negotiating position.

4. Examine The Terms

While it is beyond the scope of this article to discuss every single term of your potential car loan, there are a few things that you should keep in mind. Here are some of the basics that will help you avoid potential pitfalls in your car loan.

Avoid long term auto loans.

While long term auto loans can help keep your monthly payment low it can also add a considerable amount to your total purchase price. Long term auto loans are generally a bad idea because you can get yourself into a situation where you end up owing more for the car than it is worth. This type of long term loan is generally referred to as an upside-down auto loan. The general rule is that you should never secure a car loan with a term longer than five years.

Consider Insurance.

Many lenders will give you a better monthly payment if you opt into obtaining insurance for the loan. This can be a win-win situation for both you and the lender. It lowers your monthly payment and ensures the lender that they will be compensated for the loan in the unlikely event that something happens to you. You will need to look at the terms of the insurance as well, to be sure it meets your needs and really does give the coverage you want.

Beware Of Pre-Payment Penalties

Flexibility is one of the most important things to consider when securing a car loan. If you have the means to pay off your loan earlier, then you should be able to do so without penalties. Unfortunately, many lenders pack into their loan agreements pre-payment penalties. Often these pre-payment are called by different names so be sure that you completely read and understand your loan agreement.

Beware Of Subprime Lenders

Another thing that you should avoid is sub-prime lenders. These type of lenders often impose balloon payments or outrageous interest rates that are targeted towards low income individuals or those with poor credit. The type of loans these sub-prime lenders offer can be really expensive in the long run. If you have a good credit score, then use it and get a good credit loan.

Shop Around For The Best Interest Rates Possible

With the amount of lenders available there is no reason to not find one that will offer you the best interest rates possible. You should also check into deals that the lender may offer you. These deals often include ways to lower your interest rate by purchasing a vehicle that meets certain safety guidelines. Each lender is different so make sure that you inquire about interest reducing deals they may offer to their customers. Be sure to compare oranges to oranges. Make sure the payments reflect what the interest rates are. If the lower interest loan has higher payments then you should find out why.

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