Altogether, American drivers logged 3.27 million miles between March 2021 and March 2022, which proves we live in a car-dependent society.
But just because we rely on vehicles so much doesn’t mean that every person can afford one. And when you need to drive to school, work, etc., not having a car can really make commute times add up.
If you can’t afford a vehicle, not all hope’s lost though. There are auto loans available, providing the financial boost needed for a purchase.
Read on for seven factors to consider before getting an auto loan.
Your Credit Score
When you apply for any type of loan, lenders will typically look at your credit score. If you don’t have one or it’s bad, then that’ll work against you. This tells lenders that you’re bad with money, so they’ll take steps to mitigate risks.
For one, some pickier lenders won’t approve you for an auto loan. If they accept you, then you’ll get a smaller loan amount, a higher interest rate, and fewer loan options.
Before you apply, check your credit score. If it’s not as good as it could be, then take the proper steps to raise it. You might have to wait longer for a car loan, but it’ll be worth it in the long term when you can get much better terms and conditions.
Do note that there are ways to get financing without a good credit score, such as with First Financial auto loans.
Just because you can borrow a large amount doesn’t necessarily mean you should. You need to ensure that you can make your monthly payments without fail, accounting for any emergencies too.
You should consider your income, expenses, and other financial obligations. From there, you can set a realistic budget for your car loan.
Your savings balance will have a large effect on your budget too. If you’ve got a large amount saved up and can pay for a rainy day easily, then you might feel more comfortable about a large loan than if you have nothing in your savings account.
In general, you’ll get rid of your debt much faster with shorter terms, but you’ll have higher monthly payments. Conversely, longer terms allow you more breathing room, but you’ll pay more interest, meaning there’s a higher overall cost.
Again, you’ll need to consider the factors from above to determine what loan term you’re ok with. For instance, if you have a high-paying job but it’s freelance, and your gigs are sporadic, then you might want a longer term. That way, if you go a while without work, you can still afford to make payments.
The interest rate is what you’ll pay on top of your car loan amount. Obviously, the lower the rate, the better it is for you.
This means it’s worth it to take some time and shop around to compare interest rates from multiple lenders. Even if it’s a small difference, it’ll add up over the life of your auto loan, so browse carefully.
This is also why it’s worth it to get your credit score in good shape. Every little bit counts!
The Down Payment
Like when you buy a house, you can put a down payment on your car loan. It’s in your best interest to make as large a down payment as possible.
Doing so can reduce the principal amount borrowed. As a result, it lowers the loan-to-value ratio, which is helpful if you need to sell the car before you’ve fully repaid the loan. In addition, you’ll be able to get a lower interest rate!
Of course, you can always choose not to make a down payment and still get an auto loan. If you’re not in a good financial place to afford this, then opt out.
Don’t just look at the auto loan at face value. Many people make this mistake, then end up with large financial trouble.
Owning a car will come with several expenses. For example, not only will you have to pay for gas, but you’ll also have to make insurance payments and submit registration fees. Plus, you’ll have to maintain your car, then shell out even more money for unexpected repairs and replacements.
This is why it’s important to have a decent savings balance when purchasing a vehicle. It’ll be much easier to deal with hidden and unexpected costs.
Loan Terms and Conditions
You might be excited that you’re approved for auto financing, but don’t move too quickly. You still need to read the loan terms and conditions carefully to ensure you’re getting everything you’re comfortable with.
Take the time to understand the terms and conditions. This includes any fees, penalties, or prepayment charges. If you have any questions about the fine print, get answers and clarification before you sign anything.
You should only sign the loan agreement when you’re 100% comfortable with the terms.
Is Getting an Auto Loan the Right Move Now?
Getting an auto loan can be a fantastic way to get a set of wheels. It’ll make your life much easier, as you won’t have to rely on other modes of transportation to get around, which can be a waste of time.
However, there are many factors you need to consider, which can make you rethink things. While this type of loan can improve your life, it may not be the right time to apply for one, especially if your credit isn’t in great shape.
But once you get things in order, you’ll know what to expect from a car loan. You’ll be able to get through the process with ease!
If you’d like to learn about other types of loans, then check out the rest of our blog for more finance articles.