Best Auto Loans | the ascent

What you need to know about auto credit

Buying a car can be complex. The first step is to figure out how much you can afford and how much you want to borrow. It depends on your budget, your preferences and the total cost of buying a car. It’s important to balance your needs and wants so you don’t borrow more than you can afford.

The annual percentage rate of charge (APR) tells you the annual cost of your car loan. Your loan rate is expressed as a percentage, like an interest rate. It usually includes all costs associated with your loan, such as recurring and one-time charges.

How many cars can you afford?

Everyone’s budget is different, but a rule of thumb is to keep your monthly car payment to 15% or less of your after-tax income. You should keep in mind that the total cost of buying a car includes not only the monthly loan payment, but also sales tax, cost of insurance, gas, license fees annual, as well as maintenance and repairs. Parking can also be an additional expense.

For example, if your salary is $50,000 per year, 15% would be $7,500 per year or $625 per month. Depending on your location, driving history, type of car and other factors, your monthly car expenses can be:

  • Car payment: $300
  • Car insurance: $90
  • Maintenance: $50
  • Fuel: $60
  • Total monthly cost of owning a car: $500

You can get an insurance quote before you buy the car and check the gas mileage to estimate your costs. After doing your research, knowing how much you can afford and what type of car to buy, the next step is to research the best car loans.

Get your auto loan pre-approved

Before stepping into the parking lot, get a pre-qualified or pre-approved loan first. This can give you leverage when it comes to trading. Dealerships will try to offer you financing but may not offer you the best rate. You will also know how many cars you can buy. The temptation to upgrade to the latest bells and whistles can be high, so having the amount pre-approved beforehand can help you stick to your budget.

Dealerships tend to take people with a pre-approved loan more seriously because they know they’re ready to buy a car, as opposed to someone just window shopping. Many financial institutions or lending platforms will approve your loan the same day you apply.

Information you need to apply for a car loan

When you apply for a car loan, you will usually need to provide the lender with your salary and employment information, the amount you want to borrow, and your housing information. The lender will check your credit score. Your approval and interest rate will largely depend on your credit score and history. If you have bad credit, you can offset the higher cost of a loan with a larger down payment or shorter loan term.

Since the price of the vehicle is also taken into account, the conditions vary depending on the vehicle you choose. It is important to know that when financial institutions announce low interest rates, it is generally for those with the best credit ratings.

Once you start applying for car loans to find the best rates, lenders will thoroughly investigate your credit report, which will hurt your score. However, if you apply for a loan within two weeks, the credit bureaus will count them all as one application. It is important to time your requests and apply to different lenders during this two week period.

Balance your loan terms with your budget

Generally, the longer your auto loan term, the higher your interest rate. Getting a shorter term loan means you pay less interest, but the monthly payment amount will be higher. Look at your budget to find an affordable monthly payment that balances financing costs.

Some financial institutions will allow you to include sales tax, title, registration, or even warranty fees in the car loan. This will increase your loan payment. Take care that your loan does not become “upside down”. With additional fees built into the loan, you might owe more than the car is worth.

Your final loan amount will depend on the purchase price of the car, minus the total down payment you make, and the cash value of your current car if you plan to sell or trade it in. Here is more information about these conditions:

Trade in value

The value of your current vehicle will be subtracted from the price of your next car. The dealer essentially buys your car from you. The trade-in value is generally lower than that of the sale on the private market.

Advance payment

You can choose to pay as much or as little upfront as you want. The more you save, the less you need to borrow, which can lower your monthly payment. Some lenders will require a minimum down payment, depending on the car.

term of the loan

This is the length of time it takes you to repay your loan. This affects your APR and the amount of interest accrued over its lifetime. A shorter loan term might reduce your long-term costs, but will likely increase your monthly payments. Loan terms depend on the bank or credit union. They are usually 36 months, 48 ​​months, 60 months and 72 months. Some financial institutions offer loan terms of up to 84 months or 7 years.

Equity

This is the value of your car after deducting any outstanding debt. If you owe $5,000 on a $10,000 car, your equity is $5,000. The amount of equity you have in your car can affect your refinance rate. Some lenders will not allow you to refinance a vehicle if your capital is too low.

The different types of auto credit

Rates will depend on the type of auto loan you get. New car loans are usually for new cars or cars under a certain mileage or car year. A used car loan is for a used car below a certain year or above a certain number of miles. Used car loans usually have the highest interest rate due to depreciation and lower prices than new cars. Used cars also have more mechanical problems.

If you already have a car loan, you can refinance your car to get a lower interest rate. Refinance loans generally have the lowest interest rates. It makes sense to refinance your car if you had bad credit and since then your credit score has improved. Some lenders will not refinance a car that is too old, over a certain mileage, or below a certain value.

The last thing used for an auto loan is to buy out a car lease. A lease buyout loan gives you the ability to buy your currently leased car. You can use the loan to buy your car at or before the end of your lease.

Your car is guaranteed

An auto loan is a type of secured loan. If you are unable to repay your loan, the lender will repossess the car as collateral. He will then try to sell the car to recoup his losses. Because an auto loan is a secured loan, they offer better rates than unsecured loans such as a personal loan or a credit card. If you sell the car or trade it in for an upgrade, you will need to pay off the remaining balance on the loan.

It is common for people to buy more cars than they need. Once you’ve checked your budget to find the optimal total cost you can afford, do your research and shop around for the best auto loans. Online banks and credit unions generally have better rates than physical banks. By getting a pre-approved loan, you’ll be able to get the best rate available and you’ll have better bargaining power with the dealership.