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- The better your credit score, the better your interest rate on a car loan is likely to be.
- You should look at the monthly cost of the loan, but also the total cost long-term.
- You should also try to find a loan that doesn’t have a prepayment penalty.
In the market for a car? Sky-high prices for both used and new cars have forced many shoppers to turn to auto loans to finance their next set of wheels.
But getting a loan is easier said than done. A record number of people applying for auto loans have been rejected in the last year, according to the Federal Reserve Bank of New York.
Thanks to the double whammy of high inflation and interest rates, many Americans have struggled to make their car payments. Coupled with the fact that cars are a lot more expensive, this has made auto lenders more hesitant to approve new loans.
This doesn’t mean buying a car is out of the question. It just means readjusting your expectations — and asking the right questions when it comes to taking out a loan. Here are six questions to ask.
1. What’s my credit score?
Your credit score plays a significant role in determining the interest rate you’ll be offered on a car loan. Lenders use this score to assess your creditworthiness and determine the level of risk they would be taking by lending you money. The higher your credit score, the better your chances of securing a lower interest rate.
For example, at the end of 2022, those with a credit score of at least 780 had an average new car interest rate of 4.75%. Those with low credit scores, between 300 and 500, saw an average rate of 13.42%. A higher score could save you a substantial amount of money in interest payments over the life of the loan.
Before applying for a car loan, it’s crucial to check your credit score and take steps to improve it if necessary. This means paying your bills on time and in full each month, reducing any outstanding balances, and keeping your credit utilization low.
2. Can I afford the monthly payments?
Before you even think about taking out a car loan, it’s essential to take a close look at your monthly budget and determine whether you can comfortably afford the payments.
Remember, a car loan is a long-term commitment, often lasting several years. Make sure to consider your current financial obligations, such as rent or mortgage payments, utilities, groceries, and other expenses.
It’s important to leave room in your budget for unexpected expenses and to avoid becoming financially strained due to excessive car loan payments.
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3. What’s the interest rate?
Interest rates on car loans can vary significantly depending on factors such as your credit score, the loan term, and the lender. It’s crucial to shop around and compare interest rates from multiple lenders to ensure you’re getting the best deal possible.
Even a seemingly small difference in interest rates can have a significant impact on the total amount you’ll repay over the life of the loan. By securing a lower interest rate, you can save money and reduce your financial burden in the long run.
4. What’s the total cost of the loan?
While the monthly payments may seem manageable, it’s essential to also consider the total cost of the loan. This includes not only the principal amount borrowed but also the interest payments over the loan term.
A longer loan term may result in smaller monthly payments but could also mean paying more in interest over time. On the other hand, a shorter loan term may have higher monthly payments but can save you money in interest charges. Carefully consider the total cost of the loan before making a decision.
5. How much can I afford for a down payment?
A substantial down payment can work wonders in reducing the total cost of your car loan. It reduces the amount you need to borrow, which in turn lowers the monthly payments and the total interest paid over the loan term.
Aim to put down at least 20% of the car’s purchase price as a down payment. This demonstrates your commitment to the loan, making you a more attractive borrower to lenders.
6. What are the repayment terms?
Before finalizing a car loan, carefully review the repayment terms. You definitely want to consider your options if you plan to pay off your loan faster than the term length.
Some loans may come with prepayment penalties, which means you’ll be charged a fee if you pay off the loan early. Try to find a loan without these penalties, which allow you to pay down your loan quicker and save on interest.