50 Things To Know Before Buying a Car or Getting an Auto Loan
Getting a car loan is a huge commitment. It could take you up to six years to repay your loan. Before you sign on the dotted line, here are 50 things you need to know about getting a car loan.
1. You are Entitled to a Free Credit Report
Every U.S. consumer is entitled to at least one free credit report every year through www.annualcreditreport.com. In some cases, you may be eligible to receive additional reports free of charge. Since your credit will determine whether or not you get approved for a car loan, it is a good idea to review a copy of your report before applying for a loan.
2. Your Credit History Will Affect Your Loan Rate
Borrowers with a limited credit history or a history of bad debt will always pay a higher loan rate than an applicant with good credit. For this reason, it is a good idea to fix your credit or build it up prior to getting a car loan.
3. Your Credit Report May Have Errors
Credit reports sometimes contain inaccuracies. Consumers find more than 13 million errors in their credit reports every year, according to Consumer Reports. If you find an error on your credit report when you check it, you should dispute it immediately with the appropriate credit bureau. Some errors could leave you paying a higher rate on your car loan.
4. It’s Good to Know Your Credit Score
Thanks to a relatively new law, consumers have access to their credit score. It is a good idea to know how you are scored by each of the three credit bureaus. If a car dealer or a lender tries telling you that your score is below 600 when each bureau has already told you that your score is above 700, you know it’s time to find a new lender.
5. A Low Debt-To-Income Ratio Will Work to Your Advantage
Your debt-to-income ratio is the amount of money you have going out versus the amount of money you have coming in. If your debt-to-income ratio is below 30 percent, you will be more likely to get better terms on your car loan.
6. You Must Be 18
You need to be at least 18 years old to apply for a car loan. Buyers who are under the age of 18 are not considered legally responsible under U.S. law to sign contracts of any kind. This includes car loans or sales agreements.
7. A Co-Signer Can Help
Bad credit or a limited credit history can be problematic when you get a car loan. Some lenders will refuse to approve your application; others will charge you an astronomical interest rate. If you find yourself in this position, you may want to consider asking a trusted friend or relative to co-sign the car loan. A co-signer with good credit will make you seem less risky to the lender.
8. A Co-Signer is Responsible for the Loan’s Repayment
Before co-signing or asking someone to co-sign a car loan for you, you should be aware that co-signers are responsible for the repaying the loan if the borrower defaults. Co-signers are also liable for any late charges, penalties, and legal fees that might be associated with the loan.
9. Some Lenders Only Loan to Prime Borrowers
If your credit is less than perfect, you may not be able to just pick a lender out of a hat. Some lenders only offer car loans to prime (good credit) borrowers. This doesn’t mean that you won’t be able to get a loan; it simply means that you will need to find a lender willing to finance subprime (questionable credit) borrowers. It is important to note that there is no “official” cut-off to differentiate between prime and subprime, but anyone with a credit score below 620 is generally considered subprime.
10. You Will Probably Have to Show Proof of Income
Although some lenders provide “stated income” loans that do not require you to show proof of income, most will ask for some sort of documentation. Things you will be asked to provide include paystubs, banks statements, and federal income tax records.
11. You Will Probably Need a Job
There aren’t very many lenders out there who are willing to give out car loans to borrowers who do not have a job. However, there are exceptions. If you can prove that you have income or some other means of paying off the loan, you might be able to find a lender willing to work with you.
12. The Car Loan Must Be Affordable
Because it can be so easy to get swept up in the excitement when buying a new car, it is essential that you determine how much you can afford on a monthly basis before walking onto the car lot. There are a lot of software products and free calculators online that can help you with this. Be sure to take advantage of them before you take out a loan.
13. You Can Negotiate a Lower Price
If you want to get a good deal on your car loan, you need to start by getting a good deal on the car. To do this, you will need to negotiate with the car dealer. Although this may seem intimidating at first, know that the car dealer expects you to negotiate and that only a fool pays sticker price.
14. It Is a Good Idea to Get Pre-Approved
Getting pre-approved for a car loan can save you time and heartache. There’s nothing worse than picking out a car and then finding out that you can’t get a loan large enough to cover the purchase price. Getting pre-approvals from several different lenders is also a good way to compare rates and terms.
15. Dealer Financing May Not Be the Best Deal
Getting a car loan direct from the dealership can be very convenient, but it may not be the best option. Some car dealers get a kickback from the finance company, which can increase the overall cost of your car loan. There is also a chance that you will be charged higher interest if you have risky credit. On the other hand, you may be able to get competitive interest rate or other perks that lower the cost of your loan if you have good credit. The best thing you can do is shop around and compare offers.
16. Rates Vary from Lender to Lender
There are no shared guidelines among lenders for car loans. Different lenders charge different interest rates. It is not unusual to be quoted a rate of 6.7 percent by one lender and 8.7 percent by another. To make sure you get the best deal, you should get quotes from at least three separate lenders.
17. Your Rate Will Not Change
Some mortgage loans have “adjustable rates”, which means the interest rate can move up and down according to a pre-specified index. Car loans are different. The interest rate on a car loan remains fixed for the entire life of the loan.
18. Not Everyone Qualifies for Zero Percent Financing
Dealers frequently advertise zero percent financing or other incentives that seem too good to pass up. Unfortunately, most buyers do not qualify for zero percent financing. You have to have excellent credit–a score of 700 or more–to be eligible for the best deals.
19. Rebates Can Affect the Rate You Pay
A rebate is a price reduction that is sometimes offered by car dealers. If you are financing through the manufacturer–for example, financing through Toyota to buy a Toyota–you may be asked to choose between a rebate and a low interest rate. The only way around this may be to seek outside financing. If you find your own lender, you might be able to take advantage of the rebate and get a low interest rate.
20. Trade-In Credit Could Lower the Amount You Need to Finance
If you have an old car that you can trade in for credit, you may be able to lower the total amount you need to finance. The amount you can get for your old car will depend on the dealer, the car’s condition, and your negotiating skills. You can make the most of your trade-in by negotiating the purchase price of the new car first and then mentioning that you have a trade-in later.
21. You Can Roll Over Negative Equity
If you owe more on your old car than it is worth, you can still get a new car loan by rolling the old balance over into your new loan. This is a common practice among car buyers. Be careful though. If you do this too often, you could end up with so much negative equity that it is impossible to sell or get a new loan to pay off the balance.
22. The Loan Term Will Impact Your Overall Costs
Most car loan terms last between 36 months and 72 months, but it is possible to get a longer or shorter term. A shorter term will mean higher payments and less interest paid over the life of the loan. A longer term has the opposite effect: smaller payments and more interest. When in doubt, go with the longer term. You can always put extra on the loan to pay it off sooner.
23. Additional Fees Could Increase Your Payments
When you buy a car, you might end up financing more than the cost of the vehicle. Additional fees like delivery, sales tax, and title transfer add up. To avoid paying interest on these items, you will need to pay for them upfront. The cost varies depending on the state you live in, so be sure to ask the dealer for a rough estimate ahead of time.
24. A Larger Down Payment Means a Smaller Loan Payment
Some car dealers and lenders require a down payment; others do not. While it can be difficult to put a significant amount of money down on a car loan, you should make every effort to do so. A down payment can have a huge impact on your loan payments. For example, if you put zero down on a $20,000 car and get an interest rate of seven percent and a term lasting 48 months, your monthly payments will be $507.00. If you put $3,000 down in the same scenario, the monthly payments drop to $436.00.
25. You Should Compare Loan Offers Carefully
When comparing loan offers, you should look beyond the loan payments. Payments on one loan offer might look lower than another because the term is longer, but it doesn’t mean that you will be paying less money over the long run. You should always compare terms, interest rates, and the total amount that will be paid over the life of the loan.
26. You Could End Up Upside Down in Your Loan
Cars are almost always depreciating assets. This means that their value is constantly going down. If you pay too much for the car to begin with or if you have poor loan terms, you could end up owing more for your car than it is worth.
27. You Can Get a Loan and Still Pay Cash
Cash buyers can sometimes get a better deal on the car lot. Fortunately, there is a way to get a loan and still pay cash. All you have to do is find an institution that is willing to give you a credit limit and a check (sometimes called a draft or bank draft) that can be made out to the car dealer you want to buy from. There are many lenders online that do this; most will approve you and send you a check within 48 hours.
28. You Don’t Have to Buy From a Dealer
You don’t have to buy from a car dealer to get a car loan. Most online lenders and a lot of local banks will allow you to buy a used car direct from the buyer. All you need to do is get pre-approved for the amount you want to spend and get the lender to cut you a check.
29. A Car Loan Is Usually Better Than a Lease
There are some circumstances in which leasing is better than buying, but in most cases it makes more financial sense to buy a car than lease a car. When you lease, you essentially rent the car until your lease is up. When you get a loan, you pay “rent” to a lender, but eventually you end up owning the car.
30. Full-Coverage Insurance Is Almost Always Required
Most lenders will make you get full-coverage insurance (a.k.a. comprehensive-collision coverage) on the car you buy. This requirement is usually in effect until the loan balance is paid in full, and is meant to protect both you and the lender in the event the car is wrecked.
31. Disability and Life Insurance Is Not Required
By law, you have to insure your car. However, you do not have to insure you car loan. Your lender will probably ask you if you want disability insurance, life insurance, and other types of insurance on your car loan. These policies may be valuable depending on your personal circumstances, but they are not required by law.
32. Gap Insurance May Be Required
Some lenders will require you to pay for gap insurance if you don’t make a sizeable down payment on the car loan. Gap insurance covers the difference between what you owe on the car and what it is worth. This type of insurance is generally reserved for new cars, but policies are sometimes available for used cars as well. Gap insurance can be purchased from the dealer or from independent insurance companies and agents.
33. You Can Finance an Extended Warranty
When you buy a car, the dealer will ask you if you want to purchase an extended warranty. This warranty may or may not be necessary depending on your situation. In any regard, the cost can be rolled into your car loan.
34. Prepayment Penalties May Apply
Making extra payments or paying your car off early can help you save a lot of money providing there is not a prepayment penalty attached to your car loan. If you can, try to find a lender that will allow you to pay your car loan off early without a penalty.
35. Some Car Loans Have a Subject to Financing Clause
When you get your car loan from a dealer, your contract may have a “subject to financing” clause. What this means is that the deal isn’t really done. The lender could call you up two weeks later and tell you that the loan he thought you were approved for fell through and that you need to pay a higher interest rate if you want to keep the car. To avoid this, you can either get pre-approved before visiting the dealer or refuse to sign a contract with this type of clause.
36. Get It in Writing
When you trade in a vehicle to buy a new car, the dealer will promise to pay the balance off on the old car within 10 days. Don’t just take them at their word. Get it in writing. You are liable for that loan until it is paid off in full.
37. Make a List of Questions to Ask
There are a few things you will want to be clear on before agreeing to a car loan. Specific details to ask about include the total price of the vehicle, the annual interest rate, the length of the loan, the monthly payments, early payment fees, and the total amount you will pay over the life of the loan.
38. You Have to Read the Contract Before You Sign It
Most car dealers are reputable, but there are a few out there who will try to take advantage of an unsuspecting customer. To avoid getting scammed, you should carefully read the entire loan agreement and any other paperwork you are asked to sign. If there is anything you do not understand, ask questions or get someone to look over the agreement for you.
39. You Might Not Be Able to Change Your Mind
Most car loan agreements have a provision that gives you three days to change your mind about the car loan after signing a contract. However, there are lenders who do not include this provision. There are also lenders who will ask you to sign something that waives this right. Be sure you know the details before you sign.
40. The Lending Institution Holds the Car’s Title
Lending institutions will put a lien on your car’s title while you are making payments. What this means is that the lender owns the car just as much as you do. When you have made all of the payments, the lender will “sign off” on the title and make you the official owner. In some states, the lender actually holds the title until the loan balance is paid off.
41. A Car Loan Is a Good Way to Improve Credit
If your credit score is a little lower than you would like it to be, a car loan may be just what you need to give it a boost. A car loan is one of the easiest types of loans to get. As you make your payments, your credit score will improve–providing you make your payments on time, of course.
42. It Is Easier Than Ever to Make Car Loan Payments
In the old days, there was only one way to make your car loan payments. Today, there are numerous options. You can make your payment online or sign up for automatic monthly payments. Making payments though your financial institution or through financial software are also options worth considering.
43. Paying Extra on the Loan Lowers Your Interest
Applying extra money to the principal that you owe each month will automatically lower the total amount of interest that you pay over the life of the loan. However, you must make sure that the money goes to principal, not interest. When you send in extra money, note that the overpayment is supposed to be applied to the principal.
44. You Are Stuck With the Loan Until It Is Paid Off
When you get a car loan, you are responsible for the payments until it is paid off. You cannot transfer the loan into another person’s name or sell the car if there is a lien on the title. The only way to get rid of the loan is by paying it off or getting someone else to pay it off for you.
45. Your Car Can Be Repossessed
If you do not make your required car loan payments, your lending institution has every right to take the car and sell it at auction. Although the time frame varies depending on the lender, most will threaten to repossess your vehicle when you fall 90 days behind on the payments. If your lender cannot recoup the entire balance owed at auction, you will be liable for the remaining amount. This is just one more reason to make sure the car payment is within your budget before you get the loan.
46. Lenders Will Work With You
Lenders don’t want to see borrowers default on a loan. If you are struggling to make your payments or if you are already in default, the best thing you can do is contact your lender and discuss the options that are available to you. You may be able to change the terms of your car loan or skip a few payments.
47. You Can Refinance Later On
Although most people don’t know it, it is possible to refinance a car loan. If you are unhappy with terms on your current loan or if you recently improved your credit and think you can get a better rate, refinancing can wipe the slate clean and provide you with a loan that is more appropriate for your circumstances. You can refinance a loan with your current lender or with a new lender.
48. Refinancing a Car Loan May Cost You
There are very few costs associated with a car loan refinance, but you might have to pay something. For example, there may be an application fee or a charge for pulling your credit report. If you need to refinance without any out-of-pocket costs, shop around. There are lenders out there who won’t charge you anything to refinance.
49. Car Loan Interest May Be Tax Deductible
If you are an employee, the IRS will not allow you to deduct car loan interest. However, you can deduct the interest if you are self-employed. The catch is that you can only deduct the portion of the expense that represents the business use of the car. For example, if you use your car for business 70 percent of the time, you can only deduct 70 percent of the interest paid. The interest expense associated with your personal use of the car must come out of your pocket. For more information, contact your accountant or visit the IRS website.
50. You Have the Right to Know Why You Were Denied
If you car loan application is denied by a lender, you have a right to know why. In most cases, you will receive a letter in the mail within 30 days explaining why you were not approved. If you do not get this letter, contact the lender and request it.
