Whether you’re buying a new or used car, chances are good that you’ll need to finance the purchase. That’s why it’s important to know how car loans work. Keep reading for help navigating through the auto financing process.
Part 1: Applying for a Loan
To finance a car, the first step is to apply for a loan through a lender. Banks, credit unions, dealerships and other entities offer auto loans. To apply for the loan, all you need to do is fill out some electronic or paper documents. These documents may ask for basic information such as your income, debts, address, social security number, place of employment, age and date of birth.
Lenders just want to make sure you are who you say you are, and that you aren’t a high risk if they decide to loan you some money for your dream car.
Part 2: The Dreaded Credit Check
The car financing process also involves getting (gulp) a credit check. It’s a good idea to check your credit report at least three to six months prior to applying for your loan. A higher credit score often results in better financing terms. Click To Tweet The credit score needed to qualify for a loan will vary by lender, since they will each have different qualifying criteria and may use different credit scoring models.
If you aren’t in desperate need of a new vehicle, it may be beneficial to wait and boost your credit score before you apply for a loan. Additionally, taking on a new loan (and even applying for one) may affect your credit score. If you’re worried this could negatively impact your credit score, you may want to improve your credit score first.
Find Out if You Qualify for a Low-Credit Auto Loan Here
Part 3: Choosing a Financing Option
If you have a credit score of about 620 or higher, you might qualify for more than one type of financing. However, you’ll have to sort through the options. Most car loans involve an annual interest rate and monthly payments. In most cases, loan terms last five to seven years.
The longer the term of the loan, the more you will pay in total interest for the car. Some lenders may also offer better interest rates depending on the length of the loan. For example, they may offer low interest for 36 months, and higher rates for 72 months.
Part 4: Down Payment
For bad credit auto loans and conventional car loans, you will usually need to make a down payment. This down payment reduces the amount of money that you have to borrow. Typically this payment should be 20 percent of the car’s price. For example, the down payment on a $10,000 car would be $2,000.
See if You Qualify For an Auto Loan Here
Part 5: Payments
You will have a car payment every month. While part of the payment goes towards the loan interest, most of it will hopefully go towards the loan principal. After all, the goal is to completely pay for your car. If you had a trade-in credited toward your purchase, it might count toward the down payment or the principal.
Make sure you keep up on your payments each month. It’s important to plan ahead to ensure that your monthly payments are within your budget. Don’t forget to account for insurance and other potential costs that may come up with your new car.
Now that you have an idea of how car financing works, I hope you feel more prepared for your new purchase. Check out our offer to get started on finding an affordable loan.
Add comment