Car Loan Guide: Read This Before Making A Decision

By Raymond James

A car can be a great asset when it comes to helping you carry out daily activities. However, purchasing a vehicle is not considered a profitable investment since it is quick to depreciate. Most cars today have a significant depreciation rate as soon as you drive it out of the showroom, however we cannot discount its usefulness and value in our everyday lives.

Nevertheless, you may lack the necessary funds to purchase a car that suits your needs. This is not an uncommon situation for such a large purchase, so you can consider applying for a car loan to finance this one necessity in your life. Ensure that you apply for a car loan that you can actually afford to pay by doing your homework on your budget for repayments before setting your overall car budget.

When making a car purchase, don't consider the car price alone but also the total cost. This will help in determining the loan amount you'll pay at the end.

How Car Loans Work

A car loan is a form of personal loan that you use to purchase a vehicle. You approach a lender for money to buy the car of your choice, and you agree to repay with added interest. The interest is used to calculate the total loan amount, which you can repay in installments.

Unlike most personal loans, a car loan is secured. This means that you can use the car as collateral to secure the loan. Failure to meet your repayment obligations forces the lender to repossess the car and repay the loan.

Car loan costs consist of the principal: the vehicle cost provided by the lender and the accrued interests. The interest accrues with time as you repay your monthly installments based on the interest rates offered by the lender. The car loan principal cost may also include other fees and charges.

Depending on the lender you borrow from, you may also be required to make a down payment on the vehicle, which is a percentage of the car's price. If you want to save money on your loan overall, it is imperative to deposit a significant upfront for the car and reduce the loan amount. This way, you can clear your car loan on time and avoid huge debts.

Factors to Consider When Applying for a Car Loan

Know What You Can Afford

It is imperative to consider if you can afford the car you need. Determine whether you can also apply for a loan amount that you can afford to repay. Come up with a representative budget to determine the total costs and monthly installments to organise a repayment plan.

When drawing your budget, account for other involved costs such as insurance, repairs, servicing, and fueling. Determine the value of the car and consider the amount of down payment that you can make. If you're planning on a trade-in, consider the value of the vehicle you want to trade in and how much you need to add.

Check Your Credit

The lender will require a credit check, so it may help to check your creditworthiness to determine if you can repay the loan. Your credit rating allows the lender to determine the loan amount and whether you qualify for the car loan. To get approved, ensure you work on improving your rating by paying off your debt and clearing your credit card bills.

Lending institutions may use your credit rating to determine your interest rates and loan terms. The higher your credit rating, the higher your chances of qualifying for a low-interest car loan. However, if you don't qualify due to a poor credit rating, you can opt for car loans from an alternative lender. Alternative lenders can use other factors such as proof of income in conjunction with your credit to determine your qualification.

Acquire Pre-Approval

Getting pre-approved for a car loan allows you to know your threshold before you visit the dealer. This way, you can know what car you can afford and update your budget plan. However, it is imperative to note that a pre-approval doesn't mean you have finalised the loan process.

Search for Loan Offers

Car loans differ in terms of interest rates and the lender terms and conditions. Look for available car loan lenders in your area and find out about their terms to know whether they meet your needs. Contact different lenders in your area and ask for a quotation. Conversely, the dealer may offer financing options but heading to the dealer with a loan deal gives you a negotiation advantage.

Shop for car offers from different dealers to find a vehicle with specifications that suit you. Know your price range and avoid going beyond your means. Finalise your loan deal and finance the car of your choice.

About the Author:

Ray is a sought after thought leader and an expert in financial and money management. He has been published and featured in over 50 leading sites and aims to contribute articles to help novice financial planners. One of his goals is to impart his knowledge in finance to educate and help ordinary people create and achieve their financial goals.