Published on July 5th, 2013 | by John I.0
How to Finance a Car and Get a Car Loan
For many car buyers, figuring out how to get the cash to buy the vehicle is one of the last steps, and it happens in the dealership’s financing office. You can save thousands, however, if you make it one of the first steps and have a financing offer in hand before you head to the dealer. With some preparation, you’ll know what financing you qualify for and how to get it.
Read through the steps on the following pages to be prepared for your next car-buying adventure.
1) Learn the Basics of Lending
Unless you can pay cash for the entire purchase price, most shoppers will need to take out an auto loan to pay for their car. According to Experian, more than 85 percent of new car purchases and 53 percent of used car purchases involve an auto loan. Learning the basics of car financing covered below can help ensure you get the most affordable financing offer available.
A car loan provides buyers with the cash they need to pay to the seller of the vehicle, whether it is a car dealership or private party. That money that you borrow is paid back over time, with interest, unless you are fortunate enough to take advantage of an automaker’s special zero percent financing deal. The amount that you owe goes by a few names, including the financed balance, loan principal, or loan amount. It declines over the life of the loan as you continue to make payments.
Car Loan Interest
The cost of borrowing money is called interest. It pays the lender’s administrative overhead, their marketing, and the costs incurred by borrowers who fail to make timely payments, and it provides them with a profit. An interest rate reflects the percentage of the financed amount that you’ll need to pay back to the lender in addition to the loan principal. Interest rates are presented by their annual percentage rate so that you can easily compare one financing offer to another.
Since the amount of interest you have to pay declines along with the loan principal, the math can get pretty complicated. That’s why you’ll need to use a financial calculator, like the U.S. News Car Payment Calculator, to see how changing interest rates and loan lengths affect your monthly payment. If, for example, you’re taking out a $25,000 car loan at 4.5 percent for five years, you’ll pay $466 per month. Find a five-year, 1.9 percent car financing deal, and your monthly payments will only be $437 per month.
$29 per month may not sound like a huge difference, but over the five-year term of the loan you’ll pay about $1,740 less for the auto loan with the lower interest rate. You always want to focus on the total cost of the auto financing, not just the monthly payment.
Car Loan Term
The car loan term is simply the amount of time that you have to pay the money you borrowed back to the lender. Most loan lengths are expressed in months, but you can usually choose to pay them back monthly, weekly, twice per month, or every two weeks. If you’re paying manually, most of the time you’ll have a single monthly payment. If you have automatic payments, you’ll likely have more options.
The length of car loans offered by lenders has steadily increased through the years and now averages 69 months for a new auto loan. Seven- and eight-year car loans are not uncommon, but they come at substantial risk for borrowers. While the monthly payment will likely be lower on a longer-term loan, their interest rates and risk to your financial future tend to be higher. The net result of a long-term car loan is that your loan balance will be higher than the value of the car for an extended period of time and you will still be paying on the car when it is old enough to start needing costly repairs. You want to be able to lower the auto loan balance faster than your new car depreciates.
2) Know Your Credit Score
Your auto loan interest rate depends on many factors. One of the most important is your credit score. If you have a high score, not only are you more likely to get a better interest rate, but you are also more likely to qualify for special new car financing deals and cash back offers from manufacturers.
Your credit score is a snapshot of your creditworthiness, and lenders use it as a gauge to predict the chance that you will repay your loan as agreed. A credit score reflects the amount of debt you have, the amount of debt that is available to you based on your credit card limits, how long you have been using credit, and how promptly you pay your bills.
Credit scores are sometimes erroneously referred to as FICO scores, but the Fair Isaac Company scoring model is just one that is used. Many lenders use a blend of scores from the three leading credit reporting companies – Experian, Equifax, and TransUnion. Different models use different scales, so the 750 score you have on one publicly available credit reporting service may be equivalent to a 700 on another scoring model.
In addition to the credit score, the lender will also use information from your full credit report and loan application to determine your debt-to-income ratio. If you owe too much compared to how much you make, you’ll pay a higher interest rate or will be turned down for the loan. Not only will lenders use your debt-to-income ratio and credit score to determine your interest rate, but they will also look at them to set the length of your loan and the amount that they will require as a down payment.
3) Know How to Fix Dings in Your Credit History
The last place that you want to find out about any problems in your credit history is in the dealerships’s financing office. Consumers are entitled to a copy of their credit report from each of the main three credit reporting companies each year, and many credit card companies and online sources will provide your credit score for free. When you check your own credit, it does not affect your credit score.
Before you embark on your car-buying journey, you should already have your credit information in hand and be working to correct any errors and do whatever is necessary to boost your score.
On most scales, borrowers with credit scores above 720 will get the best rates and terms from lenders. Many manufacturer-subsidized new car deals are only available to customers with excellent credit ratings. If you have to take out a loan while you have bad credit, you can usually refinance the loan later on if your credit improves.
Whatever you do, don’t start closing credit cards to try to get higher scores, as eliminating available credit raises your percent of credit utilization and can drop your score instead of building it. A better strategy is to pay off any high-rate credit card debt and consistently pay your bills on time.
4) Shop for Good Deals
There’s more than one place to get a car loan. Some think that you have to go to a bank or car dealer to find financing, but you can also use online banks, credit unions, or finance companies to fund your purchase. In fact, car dealerships rarely loan money directly to consumers. Instead, they act as agents for other lenders and take a percentage of the loan as their profit.
Consumers should also learn about the car deals that are offered by automakers by exploring our Best Car Deals and Best Lease Deals pages. Car deals from automakers can be significantly better than what a bank can offer, because automakers can provide subsidized financing to increase sales. The deal could be so good on a certain model that it sways your buying decision, especially if the model ranks highly on our site.
Many car deals can also be found by using our Best Price Program, where we work with local dealers to show you a guaranteed price. It can save buyers an average of $3,279 off MSRP.
5) Apply at Multiple Lenders
Just as you shouldn’t seek out only one offer for the price of your new car, you shouldn’t look for just one financing offer. It’s OK to apply for financing at more than one lender, though you have to be a bit careful how you do it and make all of your applications within a short period.
It takes a bit of time to fill out the applications, and you will have to provide a wealth of personal information to complete the forms. Be truthful on the application and don’t exaggerate your income, underestimate your debt, or fail to disclose any judgments or other financial obligations. Even after a lender makes you a loan, they can request immediate repayment if they find you were untruthful on your application.
When a lender pulls a credit report, it knocks your score down a few points. Fortunately, the credit scoring models are smart enough that when they see several lenders pulling reports over a short period for the same type of loan, they consider it just one transaction. If, however, you apply for one loan this month, another a few weeks later, and yet another the next month, it will be seen as three “hard-pulls” on your credit report and you’ll be dinged three times.
6) Don’t Let a Decline Depress You
It can be frustrating and stressful to have a loan denied. However, in the long run, it can be a gift. If you have been denied, it means a financial professional does not think that you have the ability to repay the amount of money that you are requesting. Although it is really tough to hear, they may have just prevented you from making a financial mistake that could cost you a lot of money, wreck your credit, and cause your ride to be repossessed by the lender.
When you a declined for financing, the lender is legally required to provide you with the reasons. If it was because of erroneous information, you can probably fix it pretty quickly. If it was because of negative information on your credit report or a lack of enough income to afford the loan you requested, you should take it as a challenge to overcome or reduce your car-buying goals to something more affordable.
Inquire with the lender what you need to do to qualify in the future. Many lenders at smaller institutions such as community banks and credit unions are willing to work with borrowers that have credit challenges, and some have specific programs to help you get to a place where you qualify.
Though you might be willing to do whatever it takes to get a yes, don’t fall into the trap of going to a lender who promises that they can finance anyone, and don’t use a buy here, pay here dealer. Many of those lenders charge exorbitant interest rates and lead you into a loan that is hard to dig your way out of.
7) Look at the Fine Print
In some cases, lenders can restrict a vehicle’s use. Some lenders, for example, don’t allow vehicles to be used for ride-hailing services such as Uber or Lyft.
If you are thinking about using your vehicle for business purposes or a ride-hailing company, be sure to inform potential lenders. In many cases, such financing is considered a business loan and is subject to a different set of procedures and may be priced differently than a standard consumer loan. Failing to inform a lender of business use can get the financing revoked at any time during the loan term.
Some loans come with a prepayment penalty – you’ll want to avoid such loans. While you might not think you will be able to pay it off early, you could have a windfall and be able to pay the balance and save some interest. If you can pay it off, you won’t want to have to pay a fee to do it.
8) See What Financing the Dealer Is Offering
It is a good idea to have a pre-approved financing offer in your pocket before you get near a car dealership. While an auto dealer might be able to beat the offer you have, if you don’t have one, they will have no incentive to find you the best financing deal. If you already have an acceptable offer in place, you can focus on the price of the car and the value of your trade-in.
Negotiating the price of the new car, the financing, and the value of any trade-in you have separately can save you money, as you’ll be able to negotiate exactly what you are paying for each. When they are all packaged together, it lets the seller give you a better deal on one component of the transaction and make it up with a worse deal on another component. For example, they may show you an amazing price on your dream car and make up for it by charging a higher financing rate than you should be paying.
Many car dealerships make more money on the financing they sell than they do on the cars that they sell. When they go to lenders to secure financing for your purchase, they are often looking for the deal that makes them the most cash, rather than the one that saves you the most money.
9) Check, Check, and Recheck the Loan Documents
Once you have decided on a financing offer that is acceptable, it’s time to sign the paperwork. Before you do, though, you’ll want to read each page and make sure it matches the deal you agreed to. If the seller or lender says they’ll fix it later, tell them you will sign it later too.
Watch out for loans that have a lot of fees involved, try to stay to simple options like the ones from https://completeautoloans.com/, and be sure to include any additional costs when comparing offers. Beware of loans that are variable rate with low-interest rates to start and high rates as the loan ages. With today’s low interest rates, there’s little benefit to variable-rate financing.
10) Make Your Payments
Automatic payments are an excellent way to avoid missing an installment on your loan, as there’s little chance for a payment to be forgotten or lost in the mail. Some financial institutions offer lower interest rates to borrowers who agree to automatic payments from their checking account or as part of their paycheck direct deposit.
You might think that when you buy a car, it’s all yours and you can do whatever you want to with it. If you have a auto loan, however, that is not true. Until you make the final payment on the loan, the title to the vehicle is held by the lender. Most financial institutions will demand that you carry a certain amount of insurance to protect themselves if you total the car or someone steals it. If you let your insurance lapse, the lender will likely buy their own insurance for it and charge you. You don’t want that to happen, as their coverage is costly and only protects their interests, not yours.
If you fail to make your payments, a lender can repossess the vehicle and sell it to recover the amount you owe. In some states, if you owe more than the vehicle is worth, you’ll still be liable for the difference.