Many people get car loans to finance a purchase they’ve spent weeks and months researching. However, most people spend little time browsing loan options, and land up with bad auto financing. Here are tips for getting the best car loan to avoid such financial pitfalls.
Know Your Budget
Many American households don’t set up a yearly budget. Money comes in and goes out without a well-planned and rational approach. This results in people falling behind on credit card payments and future financial trouble. Before buying a new car, it’s important to sit down and determine how much you can afford to pay every month for a car loan. Financial experts recommend spending no more than 15% of your monthly net income on transportation. This includes loan payments, car insurance, repairs, gas, maintenance, etc.
Check Your Credit
Credit reports and scores provide potential lenders with information about an individual’s credit risk. These reports show whether a person has a history of paying back debts on time to retailers, lenders, and credit card companies. You can obtain a credit report from each of the three major credit-reporting agencies—Experian, Equifax, and TransUnion, via the website annualcreditreport.com. Always review your credit report to ensure there are no errors. If you find discrepancies, contact the credit agency and have them corrected.
Make a Substantial Down Payment
As part of the pre-approval process, you may have been asked how much you plan to put down as a down payment. A down payment is the initial amount of money you pay for the car, typically between 10% to 20%. It serves two purposes: first, it reduces the loan risk for the lender, as they have that money even if you fail to make payments. Secondly, a larger down payment means a smaller loan amount.
Choose the Shortest Loan Term Possible
It’s financially beneficial to borrow as little money as possible and pay it back in the shortest time. The longer the loan period, the higher the interest. While choosing a longer loan term may be tempting to lower the monthly payment, it will result in paying interest for a more extended time. This can be costly. A longer loan term is beneficial only if the interest rate is zero percent, as it will result in lower monthly payments without any additional interest costs.