Auto Loan Basics

What You Should Know about Auto Loans

Purchasing a new car is a big deal for most people, quite possibly the second most expensive expenditure many people will make after their home.

So, it is important that consumers know the ins and outs of securing an auto loan, from what impact their credit score will have on the loan’s rate to how they can increase their bargaining power with the dealership.

Good Credit Equals a Better Loan

Today, just about everyone has heard about the credit crunch – people who once could get approved for loans now find themselves out of luck. When it comes to securing an auto loan, probably the most important component to consider is your credit.

The better you credit score, the better rate you can get on an auto loan. And the better the rate, the more money you will save on interest payments throughout the course of your loan.

Now, you might have an idea of what your credit score is, but it is much better to know the actual score. Just a small difference can move you from one interest rate level to another, potentially costing you thousands of dollars in interest payments. You should find out what your credit score is 60 to 90 days before you intend to purchase a car – should you find any inaccuracies in your credit report, it will take about that long to correct them.

Set a Budget – and Stick to It

When selecting the car you want to purchase, you might consider the size of the car, its fuel efficiency or even its resale value. The first aspect you should be considering, however, is how much car you can actually afford.

Financial experts recommend that your monthly car payments should not exceed 15 percent to 20 percent of your gross monthly income. If you insist on purchasing a car that consumes more than 20 percent of your monthly income, you could find yourself struggling to make the car payments each month.

In addition to the car payments, you will need to figure the cost of ownership into your budget: insurance, registration, gas, maintenance. Can you afford your estimated car payments plus everything else – and still cover your other monthly expenses?

Do Your Homework

One of the worst things you can do when purchasing a car is to walk into a dealership unprepared. Unless you do your homework, you likely will not get the best deal when push comes to shove.

In addition to knowing your credit score, you should be aware of the national prime interest rate as well as the average interest rate for car loans in your area – this information will assist you in knowing where your interest rate should be when financing the vehicle.

You also should be well-versed in the dealership’s specials, as well as those specials currently offered by its competitors. It is a buyer’s market out there so you should take full advantage of it.

First Thing’s First – Financing

Many car shoppers assume they will be able to get a pretty good interest rate from the dealership. Most of the time, this assumption is not the case.

By securing financing before going to the dealership, you position yourself as an empowered buyer, with some real bargaining power. Essentially, the salesperson will look at you as cash on the table and will likely do all he or she can to make the sale. Additionally, the dealership might offer you an even better interest rate than the loan you have already secured.

To find some of the best vehicle financing options, you really do not need to look any further than the Internet, where you can easily find numerous car loan options. Experts recommend that you obtain at least three quotes to compare.