In today’s fast-paced world, everybody is rushing somewhere to finish what they have to do. And because commuting has become a challenge, especially in busy cities, getting a car has become an invaluable necessity.
Buying a car involves a significant investment, so it would be wise to research first to avoid any headaches in the future. Below are some of the important things you need to know before you take out a car loan.
What is a Car Loan?
For some, financing a car is a better option than paying in cash to keep their hard-earned money intact if emergency spending arises. On the other hand, others don’t have enough cash on hand to buy a new car. When you take on an auto loan, you borrow money from a lending institution or through dealership financing and pay back the money and any fees and interests accrued through EMIs (Equated Monthly Installments) over an agreed time.
The EMI is determined by the loan amount, the length of time you must pay back the loan, and the number of fees and interest you must pay throughout the loan. Other factors that could impact the EMI are:
- Car model
- Purchase price
- Servicing fees
Your EMI will be reduced if your loan is for a longer period of time. However, keep in mind that longer-term loans have higher interest rates, so you may end up paying more in the long run.
- Look at the total purchase price – The price you would be paying for isn’t usually what is just printed on the price tag. Other charges such as sales taxes, dealer fees, and the cost of extra features are included in the total purchase price. Make sure you calculate all additional costs and negotiate before driving that car out of the dealership whenever possible.
- The total cost of the loan – Car financing involves a lot of other expenses that might surprise you. These include:
- Interest rate
- GAP (Guaranteed Auto Protection) insurance
- Credit insurance protection
- Prepayment penalty
- Extended warranties
These aspects could add to the total amount of the loan. So make sure you look into these aspects, see what you need, and run the numbers first before signing your name on that auto loan agreement.
- Know your credit score – As with any other loan, your credit score is the most important factor determining which type of financing you qualify for. Your credit score will determine how willing a lender would be to trust that you are willing, able, and responsible enough to pay your loan. Your credit score is based on your credit history — the total number of loans you are currently paying for, the total amount of your debt, and your repayment history. The better your credit history looks, the higher the chance you will secure the best auto loan rates.
- Consider the length of the loan tenure – Loans are also considered investments, and you should pay for them during the entire loan tenure. While longer loan tenures could entice you with lower monthly payments, it could also mean a higher interest rate on your loan. Remember that the general rule is that the shorter the loan tenure is, the lower the interest will be and the lower your car’s total cost.
- Documentation – Getting a car loan requires accurate and complete paperwork. When you go into a vehicle dealership or any lending institution to get a loan approved, make sure you have all of the essential papers with you, as well as your credit history. Opt to get an auto loan from a bank or other institution. It will help if you already have an established financing offer before walking into a car dealership. It may serve as additional leverage when negotiating for the best deal with the car dealer.
These factors will help you decide which auto loan will be best for you. If you still need more information, you could ask for advice from a trusted loan officer or an authorized representative of the car dealer you are eyeing to get the best deals for you.