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Woman hugging her new car she got with a loan.

How To Choose a Car Loan

The best way to choose a car loan is by going into negotiations prepared. Know your credit score and leverage competing loan offers while you are at the dealership. Make sure that you keep the term as short as you can afford, put money down, and don’t purchase above your means. 

Why Should You Get a Car Loan?

In many cases, a car’s value will depreciate faster than you will repay the loan you have, which will leave you owing more on the loan than it is worth. Despite this, having a way of getting around is important, and most people do not have enough money to pay for a reliable vehicle. 

Getting a loan can be beneficial, but only if it is done wisely. For instance, using a loan to buy an expensive car you cannot afford is not wise. Just because a loan enables you to purchase a brand-new car does not necessarily mean that you should go for it.

It is important to know all of this information before you go in to negotiate a loan because what you can afford and what a dealership will say you can afford are two very different things most of the time! So, what can you do to ensure you are getting the best deal?

Check Your Credit Report and Credit Score

Two of the biggest factors determining how much money you are qualified to borrow are your credit score and income. These two things will also determine the interest rate you will be paying. 

Car loans are much different than other kinds of loans because you will likely be able to get a car loan no matter your credit score.

Before applying for a car loan, check your credit report to see if there are any errors or incorrect information on your report. This could be inquiries from loans you did not apply for or other forms of fraudulent activity that could potentially result in you being turned down for a loan or offered one with an incredibly high-interest rate. 

If you find any issues on your report, you can file a dispute to correct them before you apply for your car loan. 

If your credit is poor, considered to be about 600 or lower, you may want to consider putting off getting your car if you do not require one. Instead, think about waiting six months to a year and working on improving your credit. 

This can be done by ensuring that you make your payments on time and pay down any credit card balances you have. This will improve your credit score and help you qualify for a better loan. 

How Your Credit Score Will Impact Your Rate

This will differ depending on who offers you a loan. Dealerships will often advertise the best interest rates on their cars, so you shouldn’t assume you will get those if you don’t have perfect credit (buyers with a FICO score of 750 or higher). 

If you have a credit score in the low 700s, you will still get a pretty good interest rate but might not qualify for some of their promotions. If you have below-average credit scores of 650 and below, you may get a car loan rate of 10% or even more. 

If you have a very low credit score, you must shop around to ensure that you are getting the best rate available to you.

You will still probably have to pay more than someone with good credit, but you do not have to settle on the first rate you receive.

Get Financing Quotes 

Dealerships serve as brokers for multiple lenders, so if you have amazing credit, you will probably be able to get the best rates right from them. If you do not have amazing credit though, you should look into loans for people with bad credit.

When doing so, you will complete a credit application before being given an interest rate and max amount you can spend on a car. This way, you can compare it to the loan the dealership would be willing to give you, but you walk in knowing what numbers the dealer will have to beat. 

Consider Getting Preapproved

Preapproval means that a lender reviewed your credit report and information provided to determine a loan amount and rate that they will give you. Alternatively, pre-qualification means that you will likely get a loan at a certain rate based on personal financial information, but it is not an offer to fund you.

If you have done your research and are ready to get your auto loan, there are various advantages to getting preapproved for an auto loan. One of these advantages is that you will have more power while negotiating at a dealership, which will, in turn, protect you from marked-up rates.

Use Offers To Set Your Budget

You should use these preapproval offers to set your budget. However, this does not mean buying a car that maxes out the loan amount. You must account for taxes and fees. You should also remember that you do not have to spend that much, and you may do much better buying a less expensive car to get better, smaller payments.

Keep Terms Short 

When getting a loan, you should keep your term short as you can afford it. This is because shorter loans will come with lower interest rates. The monthly payments will be higher, but you will be out of debt faster and pay less money overall. 

Many salespeople will try to sell you a car based on the monthly price, which they will do by showing you lower payments with longer terms. This does not reduce the price of the car, and a $100 difference in monthly payment will mean you pay the same for the car, and you pay more over time because of the interest. 

How Much Money Should You Put Down?

You should always try to put down about 20% of your car’s worth. This seems like an easy decision, but many dealerships won’t even require it for people with good credit. 

This is risky, especially as time passes and you find yourself owing more for the car than it’s worth. If you need to sell your car suddenly, you may come out of it still owing money. If you put down a payment, this can be avoided. 

Finalize Your Loan 

You can now choose and finalize your loan. But read over a contract before signing to ensure that it does not include hidden fees, longer loan terms, add-ons, or early payoff penalties. 

Final Thoughts 

Getting a car loan can be simple and easy if you research and prepare. Ensure you know your credit score and the rates other lenders will give you. 

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