Simplifying Car Loans With These Six Steps

What does a car loan entail? How much are you really paying in interest rate? What sort of terms and conditions should you expect? Understanding your car loan to the full extent is essential to knowing the financial implications it has. Without planning or preparation, you can find yourself overwhelmed with the monthly payments and, worse, your car getting repossessed. The guide below includes a fundamental primer on what to expect from vehicle financing, such as how to qualify for one, where to secure it, and whether or not it's a good idea.

Dig Into Your History

Who would've thought that one number can affect your financing options so much? Your credit score is perhaps the single most important factor that lenders look into when deciding whether to approve your loan request. The higher your credit score, the higher the likelihood of getting your loan approved. In addition to deciding the fate of your application, your credit score also determines how much interest you pay. A low credit score can raise some red flags and result in higher interest rates as the lender takes on a higher amount of risk.

Understand What DTI Means

DTI, abbreviated for debt to income ratio, pertains to how much of your monthly paycheck is consumed by outstanding debt payments, such as credit cards, student loans, and, in this case, vehicle financing. Every lender has a slightly varied DTI ratio, but most want the ratio to be 40 percent or lower. To put this into perspective, if you earn $2,000 a month, your total debt payments should sum up to $800 or less per month.

Figure Out Down Payment

The down payment is often self explanatory, but many people don't know the exact figures they need to put as down payment for a big-ticket purchase, like a vehicle. In a nutshell, the down payment is how much cash you can pay upfront for the vehicle. It lowers the principal owed on your car loan. To put down payments into perspective, imagine you are buying a car that has a $25,000 price tag. If the down payment the car dealership asks for is $5,000, that means your loan principal amount is $20,000, which will be divided into smaller, monthly payments.

Consider Certified Pre-Owned Models

Certified pre-owned vehicles are just another moniker for used cars. However, compared to non-certified used cars, these models come with additional guarantees regarding the vehicle's mechanical condition, namely that it has been inspected and repaired by a mechanic. Most pre-owned vehicles come at a cheaper price tag compared to brand new models, but they tend to be more trustworthy than non-certified models. Thus, the total car loan amount is lower and easier to repay.

Be Creative With Financing

Consider all sources of cash when financing your vehicle purchase. For instance, if you have an existing vehicle, getting a car title loan is a possible financing option that might yield lower interest rates than what traditional banks approved you for. Should you liquidate a portion of your portfolio's assets to pay for the vehicle in full instead of borrowing at a 12 percent interest rate? Be creative and assess all your options before signing any loan contract with a dealership.

Look Into Possible Penalties

Any possible penalties on your loan should be disclosed by the lender before finalization of paperwork. However, there are cases wherein hidden fees and early repayment penalties are inserted into a contract without the borrower even knowing about it. If you are financing through a third-party lender and buying the vehicle through a separate dealership, make sure you clarify if the deal you've struck with the dealership is contingent on securing subsequent financing approval.

Final Thoughts

Car loans are simpler and more straightforward if you know the basics. Remember that it's not all about the total price of the car. Since it's a long-term investment, you'll want to zero in on the best interest rates and loan terms that align with your financial circumstances.