When buying a new car, it is important to think about the cost of auto financing in the long run. Before taking out a loan, please remember that car values will depreciate pretty quickly (sometimes the value drops quicker than you can pay off the loan!), so you need to use the loan wisely instead of using it to buy a ride you can’t afford and get stuck owing more than the car is worth.
Find Your Credit Score
It is necessary to know and understand your credit score before applying for a loan. There are a lot of free tools online that can generate this number – creditkarma.com, for example, is a free and valuable resource to monitor your finances. The higher your credit score is, the better the chance you can secure low interest rates and higher amounts financed. If your score is above 750, you might land a very low interest rate, while those in the low 700s can get decent rates but not be eligible for the very best promotions. Borrowers with below average credit scores (under 650) may be presented with car loan rates of 10% or more. A lower score won’t prevent you from getting a car – but it will raise your interest rates. It’s important to know what you’re walking in with before you go to the negotiating table.
Average Down Payment on Car Loan
If you are buying a used car, it is recommended to put down at least 10% or more of the vehicle’s sale price. So for a $15,000 used car, you need to pay at least $1,500 up front. Lenders may require more money down on a new car than a used car to offset its quicker depreciation. In this case, an average down payment of 20% or more on the purchase price is required. This works out to $6,000 down on a $30,000 vehicle, resulting in a financed amount of $24,000. Regardless of the dealer’s requirements, it’s important to do this regardless so as not to end up in a spot where the car is worth less than is owed on the loan. This is a situation you want to avoid at all costs!
Credit Score Affects APR
Annual Percentage Rate (APR) takes into account your credit score, current rates, and length of loan. Good credit scores contribute to lower APR (as much as 6%) while bad scores raise the amount that might go up to 18%. Specific APR can be determined when you apply and get approved for the loan, but samples can also be generated online. To improve your chances of getting a better interest rate, you can spend a few months working to raise your credit score. Keep loan terms short, even if it means higher monthly payments, because the interest rates are lower. The longer it takes to repay, the more you have to spend when you add up the overall interest.
In conclusion, do your homework! Talk to online lenders, local banks, and credit unions to get loan quotes for both new and used cars. Short list around 5 institutions, do a compare & contrast, and then analyze. This will help you ensure that you are getting the very best deal possible. Don’t rush into anything, and always know exactly what you’re signing.