How to get a car loan - 5 Steps

Avoid overpaying. Getting a car loan is fairly easy process. How to get a car loan in 5 steps
How to get a car loan
  • In this short 6 minutes read article
  • Sales tactics to watch out for
  • Best car loan offers
  • How to automate payments for better credit score

The rising cost of cars

 

How to get a car loan when new car prices continue to rise. As a result, even people with good credit are purchasing used cars.

This is according to a 2019 study by Experian. The study found the average loan amounts for vehicles continue to rise. Based on the report, the average amount for a new vehicle loan amount was $32,119, while the average used vehicle loan amount hit $20,156. Additionally, the average monthly payments were $550 and $392 for new and used, respectively.

 

1. How much can you afford?

  • Down payment. 20% of the car purchase price is the ideal amount. This reduces the amount you have to borrow and the interest amount paid over the car loan term. If you cannot do a 20% down payment, try the most you can afford.
  • Monthly payment. Along with your other living expenses, budget a monthly payment you can afford to pay without stress. 
  • Loan term. The longer your loan term, the lower your payments will be. However, a car is a depreciating asset that loses value fast. The shorter the loan term, the better for you the borrower.
  • Annual Percentage Rate. (APR). The annualized interest rate is the cost you pay each year for your auto loan. 

 

2. Check your credit report

Lower scores may mean you will have a hard time securing a car loan. When you do, you can expect to pay a higher interest rate. Lenders may have a minimum credit score to qualify for an auto loan. 

It is important to check your credit report before you apply for an auto loan. To avoid surprises, you need to check your credit report six months before applying for a major purchase. If there are errors, six months will give you enough time to correct any errors. Check your credit report today.

 

Read: The true cost of car ownership

3. Apply for an auto loan

With your credit report and credit score handy, it is time to apply for a car loan. You will be aware of how much you will qualify for and what terms may get.

Auto car dealers will submit your application to many lenders and try hard to get you qualified. There may be a conflict of interest with companies the car dealer submits your loan application. This does work well, but it is best to apply for the loan yourself in a process you have more control over.

 

4. Sales tactics to be aware of

  • Zero down payment. You will often see this on sales promotions. It is best to avoid and put some down payment. The most you can afford.
  • Minimizing the monthly payment. Just watch the language used to make the sale. When you hear, “the payment will only be only $52 every week” Sounds like a small amount but $52 per week is $208 monthly.
  • Upsell on car features. We all would love to have all the Bentley features but they come with a price tag. Salespeople will entice you with luxurious features because they know car buying can become an emotional situation.
  • Pre-payment penalties. It is in your best interest to pay off your auto loan sooner than the agreed term of the loan. Some lenders may not like this and insert penalties for pre-paying.
  • Pay extra fees up front. This depends on if you can afford. Some states have sales tax on car purchases. If you can pay upfront, it reduces the amount you finance. Other fees may include car registrations and local taxes.

 

Gap insurance (guaranteed auto protection insurance) is however worth considering. This insurance covers the “gap” between what your car insurance company determines as the value of your used car and the loan amount balance. 

For example, if you have a total loss accident, and the loan balance is $14,000, the insurance company values your car as worth $9,000. Gap insurance would cover the $5000 difference. 

 

5. Automate your payments

Making your payments on time is very important. You can automate payments with a direct debit of the monthly payment from your checking account. Regular on-time payments help build your credit history fro the better.