Car Loans 101: Everything You Should Know

Buying a car is a huge financial decision. In fact, besides buying a home, your car is probably your most valuable possession. And if you’re like most of us, you’ll need a car loan to help finance the purchase. The good news is that getting a car loan is a relatively easy process- although it might seem overwhelming for car buyers due to the various aspects involved. To help you with that, here’s a comprehensive guide on car loans, how to secure one, and what it all means to get saddled up with car financing.

Key Takeaways:

• Buying a car is a huge financial commitment- it may take some effort to get all the money for it, and that’s why car loans exist!
• Getting preapproved is a smart choice as it allows you to know about the car loan, including your limit, before heading to the dealership.
• Longer car loans are typically riskier for lenders, which will reflect in your interest rate- shorter terms are often recommended.

Getting Preapproved for Car Loans Is a Smart Choice

Buying a car is exciting, but sitting in the dealership financing manager’s office with what seems like an attractive offer isn’t the ideal time to evaluate if you can secure financing for the purchase. As such, it’s crucial to get preapproved. A preapproval letter states how much a lender is willing to loan you and the interest rate you can expect.

Here’s why getting preapproved for a car loan is smart:

• Most preapprovals have a set timeframe where the offer is valid, giving you a window for checking out different cars.
• It lets you know everything about your car loan before getting to the dealership.
• By getting preapproved, you’ll know how much you can spend before you shop. That way, you don’t have to be disappointed when you find a car you love, only to realize you cannot afford it.
• You can effectively use the preapproved limit during negotiations to secure the best deal possible on your new car.

How Long Should Your Car Loan Term Be?

Securing a car loan isn’t just about how much you pay each month. It’s ideal to consider how long you want to make these monthly payments. A car loan term is the length of time you’ll need to repay the money you owe the lender. These terms often range from 3-6 years long, although you can also find shorter or longer based on your needs.

• Longer vs. Shorter Car Loans Terms

Your car loan duration will typically be stated in months, such as 36 months, 48 months, or 72 months. In the past, car loan terms used to be shorter, but as car prices rose, lenders increased the length of car loan terms. Today, it’s common to see contracts lasting 60 to 72 months. Nonetheless, a shorter car loan term will mean larger monthly payments, while a longer term could mean lower monthly payments. However, while a longer-term lowers the monthly payment, it also increases the amount of interest you pay over time. That means a 72-month term will cost you more in the long run than a 48-month loan term. That’s because longer loans are riskier for lor lenders, and that’ll reflect in your interest rate.

Essential Note: It’s vital to keep your vehicle’s depreciation rate in mind when deciding on the conditions and terms of your car loan.

Can You Get a Car Loan with Bad Credit?

When you apply for an auto loan, your lender will consider various aspects before accepting or declining your application. For example, they’ll assess your credit score, loan-to-value ratio (loan amount to the car value), debt-to-income ratio (how much debt you have compared to your income), and your likelihood to pay off your car loan. They’ll also check your payment-to-income ratio, indicating the percentage of your income that’ll be going to be consumed by the car loan- it should typically be about 15%. As such, since lenders check different factors to qualify borrowers for car loans, securing an auto loan with bad credit is possible. However, note that your car loan interest rate could be higher.

Here are ways to secure a car loan with bad credit:

• Get a Cosigner: A cosigner is someone with an excellent credit history who can put their credit rating on the line to help you out. If you make your car loan payments on time, your credit score improves without changing theirs. But if you don’t, their credit score is damaged, and they’ll eventually be expected to pay your car loan.
• Make a Larger Down Payment: You need to have consistent and verifiable income to secure a car loan with a bad credit score. Moreover, you need to make a larger down payment. It’s understandable that saving money has never been the easiest thing in the world. Still, even a few thousand dollars upfront could change your car loan monthly payments, interest rates, and even the willingness of the lender to approve your loan application.

Want to Learn More About Car Loans? Consult Our Experts!

Understanding car loans may seem like a daunting task. But with the right information, you can make an informed buying decision when it comes to financing your new set of wheels. In fact, with our practical insights, you can find an excellent car at a great price and secure a car loan that fits your needs. So visit our dealership or call us today to find out more about car loans as well as check out our wide array of inventories!

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