Cars aren’t cheap. The average cost for a new car is between $21,000 and $36,000, depending on the size of the car you’re looking for. Used cars are obviously cheaper but still average over 10 grand.
Most people don’t have this type of cash lying around. But since cars are vital to our society, getting to work, taking kids to school, and so forth, we need them. So most people will need to get car loans.
Car loans make it super easy for almost anyone in any financial situation to drive away with a car that meets their needs. Different types of car loans are available, and car loan rates will vary depending on the individual making the purchase.
Wondering which car loan is for you, and how you can go about getting one? Keep reading to learn everything you need to know about an auto loan.
Types of Car Loans
Car loans come in many different shapes and sizes. But in general, the loan structure is always the same.
You borrow a car and pay interest each month until the car is paid off. The loan is secured by the vehicle. If you fail to make payments on your loan, the lender can repossess the car in an attempt to recoup the money that they lent you.
You can find car loans from dealerships or from banks and other lending companies. But even when you get a loan through a dealership, they typically outsource these loans to banks that they have a relationship with.
You can choose car loans for brand new cars or for used ones. The most important factors to consider are the term length and the interest rates. These will determine how much you’ll be paying on a monthly basis.
The best type of car loan for you will depend on your current income and monthly cash flow, as well as your credit score. It’s best to get quotes from multiple lenders to find the best option for you.
Car Loan Interest Rates
The interest rate on your car loan is the amount of money you’ll be paying your lender in order to borrow funds. A low interest rate will be around 2% to 3%, while higher interest rates commonly float around 10 to 14%.
The single greatest factor that determines your interest rate is your credit score. Your credit score shows lenders how trustworthy you are when it comes to borrowing money and paying it back.
If you have a low credit score, that means you’re a risky borrower. Lenders that take a risk by lending to you will charge a much higher interest rate as security, knowing there’s a chance you’ll default on the loan.
On the other hand, having an average or high credit score will earn you a lower interest rate. That’s because a good credit score shows that you’re capable of paying back loans and are unlikely to miss a payment. Lenders will reward you, knowing that you aren’t a risk for them.
Taking steps to boost your credit score before applying for a car loan is super important. For starters, make sure not to miss any more loan payments.
Look up your credit score and scan your report. Look for errors and try correcting these. Paying down other loan balances can improve your score.
Also, make sure not to apply for any other loans or credit cards prior to applying for a car loan.
Budgeting for a Car Loan
It’s important that you plan your budget ahead of time when looking for a car loan. To do this, start by using a car loan calculator. You can find a car loan payment calculator online, which will help determine how large of a loan you can afford, what interest rate you’re hoping to receive, and what term length works best for your cash flow needs.
Determine your monthly budget by comparing your current income to your expenses. See how much cash you have available each month to add a car payment.
It’s best not to use all your excess cash flow on a new loan. If an emergency comes up, or if car repairs are needed, you need to ensure you have the funds available to handle these so you don’t resort to high interest credit cards.
One of the best things you can do prior to getting a new loan is to pay off old debt. If you have current credit card balances, school loans, personal loans, or any other small balances, do your best to get rid of these ahead of time.
They will free up cash flow, making it easier to make your car payments each month. Plus, doing so can boost your credit score and lower your DTI, or debt to income ratio, helping you achieve a better interest rate on your auto loan.
How to Get a Car Loan
So how can you go about getting a car loan? By following the advice listed above, you’ll be well on your way.
Start by looking at your credit score and taking basic steps to improve it. You should plan to do this at least six months before applying for an auto loan.
Then, create a budget for your car loan and figure out what monthly payments you can afford. This will show you how much you can afford to offer. Then, start researching cars in this price range and make a list of your needs when it comes to a new car.
You can then start getting quotes, finding the best lender for your auto loan. Once you have a quote that looks good to you, you can start shopping around for a car. If you’re going to a dealership, it’s important to understand basic sales tactics and do your best to negotiate.
Get the Best Loan You Can
Car loans are nothing to be feared. Most Americans have them. As long as you plan ahead, do your best to get a good interest rate, and purchase a car within your means, you’ll be good to go.
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