Buying a new car is a big-ticket expense, much like a home purchase. Because of the high costs involved, most people apply for a loan instead of paying in cash.
While borrowing can save you from putting a heavy dent in your savings, applying for a car loan could impact your financial condition. Although payable in longer terms it may still incur a considerable debt that can still cause money troubles in the long run, especially if you’ve failed to take into consideration some crucial factors before opting for a car loan.
If you’re contemplating taking a car loan anytime soon, here are some vital pieces of information to consider before committing to one:
1. Know Your Credit Score
Whether you’re approaching a traditional or alternative lender, institutions will look at your capacity to pay. These agencies typically ask for proof of income documents as one of the basic requirements. Apart from income, lenders will check your credit scores and history, which can be obtained from specific credit reporting agencies.
Your credit record is the most crucial factor in any loan you’re applying for. By checking your credit history, lenders will be able to assess your creditworthiness. Your credit scores will help set the total loan amount, interest rates, etc. Expect to get disqualified from car loan deals if you have a damaging strike on your credit report or a low score. However, few lenders accept bad credit car loans or approve loans from borrowers with limited credit history.
2. Look At The Total Loan Cost
When looking to apply for a car loan, don’t merely focus on the monthly amortization as a deciding factor. Remember that your monthly payments will reduce as your loan term is extended, but you may still pay more down the road.
Think of getting a loan as if you’re paying for the car in cash. A better approach is to compute the total cost of the vehicle or loan package when shopping around. This allows you to determine the best deal and identify if your loan is riddled with extra charges and other hidden fees.
Always check how much you’ll pay for the principal cost, and consider the loan interest rates based on various loan terms. Ultimately, a borrower also has to consider the cost of ownership for different types of vehicles. Generally, more oversized vehicles need higher prices to run and maintain.
3. Consider Other Charges And Fees
The total loan cost also requires the borrower to understand the additional charges that influence your monthly payments. There’s an Annual Percentage Rate (APR), which includes the interest rates and other expenses. Based on these costs, the sales tax will likely affect the vehicle’s price tag the most.
Apart from these additional costs, lending institutions also charge processing fees. The amount varies from one bank to another but is typically one percent of the total loan amount. In some cases, you may be able to bring this cost down by negotiating with the lender. The same holds for additional charges such as service fees, add-on accessories, and other optional controls.
Some creditors also charge a pre-closure penalty for car loans paid earlier than the loan term. Since settling in advance will save you costs, especially for the applicable monthly interest rates, they’ll collect the amount through the pre-penalty fees. Like processing fees, this type of charge varies from one lending institution to another. It’s best to choose a bank that doesn’t charge pre-penalty costs.
4. It Pays To Get Pre-Approved
If you want to be an empowered borrower, getting pre-approved for a car loan is good. If you’re a depositor in a particular bank, check whether you qualify for a car loan and check the final offer.
A pre-approved loan will give you peace of mind, ensuring that you’re qualified for a car loan covering the vehicle’s total amount. As your pre-approval comes with all the details, you’ll know how much your monthly payments are to better plan your finances. Visiting a car dealership with a pre-approved loan also means you’ll have better leverage in the negotiations.
5. You May Refuse In-House Loan Insurance Offers
Once you’re approved for a car loan, a staff member from the bank will often offer you an in-house insurance package for your convenience. While getting one is a wise decision because it can cover you in cases where you can no longer keep up with your monthly payments, don’t jump at the offer right away. Check the terms and conditions before deciding if it’s the best for you.
When you’re looking for the best car insurance, it’s better to wait and shop around for better deals. In some cases, it might be better to consult with an insurance agent who’s open to working with all lending institutions.
The Bottom Line
When it comes to getting a car loan, there are many things that a borrower must consider apart from monthly payment costs. Reviewing the total loan cost, additional charges, and getting pre-approved helps you get in the driver’s seat. It can also save you a hefty amount of money down the road.