How To Finance A Car & Get A Car Loan

Auto loan

If you have to finance your car purchase with a loan, you’re certainly in the majority.  How you establish it can set you apart, though.  Follow these guidelines for a better experience.

Shore up your credit score.  Always a good idea regardless, tidying up credit well before you start car shopping gives you an edge on better finance options and terms, and you will appeal as a good risk to a greater number of lenders.

Know what you can afford.  Assuming you operate on a budget (if you don’t, start now), you could already have a general idea of what you can spare.  Avoid tweaking that number by cutting back in other areas.  A car payment will remain the same month-to-month; many other expenses are variable and can overwhelm if your loan leaves too little left.  Look also at the cost of borrowing money to understand what you will pay over the life of the loan.  Online loan calculators can easily demonstrate this.   

Consider the sources.  Take lenders for test-drives, not just cars.  Reputable online lenders and credit unions can offer more attractive interest rates than banks.  Even some auto insurance carriers are in the act with competitive offers.  Dealers often have finance departments that make one-stop shopping a temptation, but it can come at greater cost.  If buying from a dealer, don’t rule out their financing entirely, just know what they are offering.  And when you apply to multiple lenders, do all within about 14 days to avoid negative impact on your credit score from too many inquiries over an extended period.  

Consider the terms and conditions.  For many people, approval is not so much an issue as favorable offers.  And we all know how that worked out for the housing market.  Understand fully what you are getting into, beyond just the monthly commitment.  The longer the loan term, the higher the interest rate.  Rates may also ratchet up based on the car model year and other factors.  Look closely for any penalties or fees you could encounter, as well as potential benefits like a slightly lower interest rate when you opt for automatic payments.

Weigh the optional extras.  A dealer isn’t the only source of add-ons.  Lenders offer extras on car loans.  In the event of a total loss, gap coverage bridges the difference between the insurance settlement and the balance owed.  Payment protection plans will make loan payments if you lose your job.  These and other options come at nominal cost but have restrictions, so consider them carefully.

Get pre-approved.  Shopping with the blessing of your lender tells sellers you are serious about purchasing and gives you more freedom.  You have a set maximum amount you can spend and don’t have to guess at what is possible.  If you’re at a dealer and they have more appealing rates, you can still entertain an offer without being held captive by it as the only finance option.

Keep what you get.  Once you get the car loan, stay current on payments.  As fundamental as that sounds, it is too critical not to mention.  The last thing you want is fallout from a repossession looming over you and starting the process all over.  Lenders will not be nearly as cordial after that.

Watch interest rates.  Once you have been paying on your car loan several months, watch interest rates for possible refinancing.  Avoid doing so just for the sake of lower monthly payments in exchange for a longer payoff.  Aim for a better rate and/or shorter term while at least keeping payments around the current amount.

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