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6 Things You Need to Know Before Getting an Auto Loan

By The Gopher - May 25, 2020
6 Things You Need to Know Before Getting an Auto Loan
Credits: ridetime.ca

It can be an incredibly difficult task to obtain any loan, particularly if you want to buy a car. In the United States the average cost of the new automobile is almost $40,000, and the growing demand for pre-owned vehicles has caused prices to grow dramatically in the past years.

Before applying for a loan, you may want to consider some potential problems concerning car loans. Here are things to keep in mind to avoid certain issues.

Before Going Car Shopping, Get Pre-approved

It is a smart thing to have funds before you decide to buy a car. Some of the key benefits of pre-approval is understanding how much vehicles you are actually able to buy and that information will be provided to you by your lender.

A seller will be much more willing to work with you if you are ready to sign a contract. With prior approval, you should know what your interest rate is. Perhaps you’ll want to change your buying decision to reduce the price you’re going to have to pay depending on what the bank lets you borrow.

Be Informed About Your Credit Score Range

The price you need to pay for your new or pre-owned vehicle will be influenced by your credit score. You may pay a significantly bigger amount of money than those with good ratings if you fall into a lower category on the credit score scale. So, the cost of debt for subprime borrowers is going to be considerably higher.

Three specific categories exist in credit ratings. Even though banks consider someone with a score of more than 660 as a prime lender, anybody with a credit score of less than 600 is in the sub-prime sector. Credit tracking services determine non-prime individuals who are between the two categories.

For instance, the interest rate on a car loan for credit rate 781 or more was 4.19 percent in the last quarter of 2018. Furthermore, there was just a 0.5 percent difference between a new car loan and a pre-owned car loan. Many who were graded as heavy subprime borrowers had ratings between 300 and 500. Such individuals had an average interest rate of over 14% on new car loans and over 19% on used car loans.

Apply for Auto Loan In Two Weeks’ Time

In just a short period of time, the interest rates can change significantly, so it’s a smart decision to apply for a loan in two weeks’ time before the actual day of buying a car comes.

When rates change during the time between your application for a loan to the time when you want to finally purchase the vehicle, you will end up paying extra.

If the prices are reduced, another application can always be made. However, a short-term decrease in the credit score is expected as a result of submitting another application.

Consider Dealership Financing

You would expect a bank to have better rates than a car dealer, but if you want to purchase a new vehicle, you will actually be able to get a greater interest rate with the dealership financing.

Most sellers are providing exclusive rates to attract customers to buy a new vehicle. Such sales typically happen prior to the end of the year because retailers need to clear out inventory. According to Experian, certain dealers may sell brand-new models offering promotional financing, where the annual percentage rate can be as low as 0% for those who meet the requirements.

Calculate The True Cost

When buying a car, many customers just take a look at the price tag, and think that’s all there is to it. But, the truth is, a vehicle comes with additional costs that you need to keep in mind.

There is a sales tax, which most countries charge for and it makes the cost of your car a little bit more expensive. That “a little bit more” can mean an additional 8 to 9% to the total car cost.

Unfortunately, extra costs don’t end there. Title fees, dealer fees, and license fees are also included in the total car cost.   Furthermore, as you go up with your purchase, the price of your car insurance goes up with it. In many cases, the dealer and lender will require you to have comprehensive insurance coverage because you are borrowing money, which costs a lot more than liability coverage.

Most sellers would want to persuade you to believe that extra expenses are only a few cents or dollars a day. The interest you are paying, however, could increase the cost of the loan by thousands of dollars. Hence, when you decide to make your purchase, you’ll want to keep this in mind.

Compare Rates With Online Car Loan

This process was made easier than ever by the growth of the internet. You will match current prices by looking for online lenders and some of them will also let you apply online. All of that enables you to have an idea of how much you can spend on your new car.

Your car is potentially one of the greatest investments you can make outside of your house. At the time you decide to make a purchase, your rate of interest may differ considerably depending on the common market rates. It will change along with your credit score, too. Therefore, purely based on your own conditions, put effort into finding the best possible rate.