Checking Your Budget And Knowing What You Can Afford
There’s plenty of options out there for car loans. The first step to know which option suits you best is by checking your budget and knowing exactly what you can afford.
Taking on monthly payments for a car loan is only one of the many expenses you will have when owning a car. Hence, it is a good idea to check all the costs involved, such as insurance, gas, taxes, just to name a few.
If you have money saved to use as a down payment, it will be much easier to get approved for a loan. Most lending institutions will take a look at your credit history and proof of income. Working on building your credit score and sorting out your paperwork to demonstrate income will get you ahead of the game.
Once you have figured out your budget, you can start considering the car loan options available and which one suits you best.
Choosing A Car First
Most of us fall in love with a car before checking if we can afford it. This is one of the most common mistakes. When choosing a car, it is easy for our emotions to get involved, and as a consequence, we will be more susceptible to accepting less-than-stellar deals.
Ideally, you want to check your finances, decide upon possible lenders, and get pre-approved financing before choosing the car. The aim is to buy a car that responds to your needs and doesn’t overstretch your finances.
Research Multiple Lenders
As we stated above, there are many options out there when it comes to car loans. From banks to credit unions, dealer finance to the peer-to-peer lending platform, you will find that requirements, selection criteria, and loan terms vary.
It is a smart move to evaluate these options to assess which one works better for you. Most lenders have loan calculators on their website that immediately let you know which terms you could be approved for, including monthly payments and interest rates. Don’t sell yourself short!
Reduce the Impact on Your Credit Score When Shopping for Car Loans
Keeping your loan shopping short, i.e., within a couple of weeks, won't impact your credit score.
However, if you spread it over several weeks or months, the credit bureau might consider that the different report requests from sellers might amount to multiple purchases. Consequently, they might knock your score down a few points each time.
Shopping Without Pre-Approved Finance
Walking into a car dealer with pre-approved finance is a huge advantage. It means you have done your homework. You know how much you can spend and you have a rough idea of which car you want. Most importantly, you hold financing terms in your pocket, which sets a benchmark to start negotiations.
Beware of the Salesperson: Unbundle The Deal
It is usual for car dealerships to offer bundles, including finance, the price of the car, and, sometimes, the value of your trade-in. Mixing and matching all these variables can be confusing for the buyer. However, at the same time, this gives the seller an advantage.
Skilled salespeople might shift around the numbers to seal the deal. This makes it look like you are getting the deal of a lifetime on one piece of the puzzle while selling you awful terms on the others.
When you have pre-approved finance, it is easier to unbundle the deal. If the dealer wants to earn your financing business, then they will need to beat your current offer, which grants you a much stronger position to negotiate.
Avoid telling the salesperson your budget. Likely the salesperson will try to get this information from you, and once they do, all their calculations will start higher or around such numbers. In a best-case scenario, you wish to end up spending less than your actual budget to better off the terms of the loan. If you let them know your budget upfront, you will miss the chance to get offers under such levels.
Keep in mind that when applying for a car loan, you want to put that towards the cost of the car itself. Financing costly add-ons, fees, or taxes will raise the loan-to-value ratio and possibly translate into higher interest rates.
Resist the pressure to buy add-ons at the dealership that you could buy later on at a fraction of the price elsewhere. The most common add-ons offered are extended warranty, window etching, paint and fabric protection, gap insurance, key protection, nitrogen for your tires, dent protection, and rear-seat entertainment systems.
Even when dealers offer these add-ons as a “one day only” deal, you will find that weeks or even months later, you can purchase the same add-ons from them at the same price. So, don’t cave in.
Doing a little homework, checking several options before you go on a car shopping spree, and refraining from acting on impulse, can get you a long way when it comes to avoiding the most common mistakes when getting a car loan.
In the end, it’s all about protecting your hard-earned cash and getting the best value for money deal when buying a car, without straining your finances. It takes a little math to sort it all out, but it’s worth the trouble to avoid finding yourself in a sticky situation with legally binding contracts later on.