Tips for Choosing the Best Car Loan for Your Budget

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While many car shoppers focus on the purchase price of a vehicle, it’s important to consider your financing options as well. Consumers who neglect to shop around for the best auto loans could wind up spending hundreds or even thousands more than necessary on their vehicle.

Getting preapproved ahead of time can give you more leverage during the negotiation process at the dealership. This will also allow you to rate-shop without impacting your credit score because multiple hard inquiries are counted as one by most scoring models.

1. Know Your Budget

When calculating your car loan, be sure to factor in all costs associated with owning a vehicle including fuel, insurance, taxes and dealership fees. You’ll also want to consider the annual depreciation of your vehicle and whether that expense makes financial sense for you compared to the loan amount.

Try to keep your monthly vehicle costs, or total cost of ownership, to about 20% of your take-home income. This helps your credit score as well as your debt-to-income (DTI) ratio, which lenders use to determine whether you are eligible for a loan.

Shopping for a loan in the same short window, as opposed to spreading your application out over several months, can also help your scores. Plus, it will reduce the number of hard inquiries on your report.

2. Know Your Credit Score

Your credit score can impact your ability to get financing and the terms of a car loan. It also can determine whether you pay less in interest charges or have to borrow more overall.

Most creditors use a credit scoring model based on your credit report to evaluate your creditworthiness. These scores typically range from 300 to 850.

It’s a good idea to check your credit scores before you start shopping for a car. That way you can see how your credit history has changed and check for errors that may have been reported to the credit bureaus. Those errors can lower your credit score, and in turn increase the likelihood you’ll be denied a car loan. Then, when you shop for car loans, you can compare your options with confidence.

3. Get Pre-Approved

Getting pre-approved for a car loan is a smart move before you start shopping. It can help you set a realistic budget and empower you to negotiate from a position of strength when it comes time to buy.

Car dealerships can pressure you to accept financing terms with higher interest rates than you might qualify for, and accepting these higher rates can cost you hundreds of dollars over the life of your loan. Having an auto loan pre-approval letter from a lender can make the process smoother and protect you from dealership oversells.

Applying for a preapproval does require a hard credit inquiry, which may temporarily impact your credit score. However, it is recommended that you submit multiple pre-approval applications at a few different lenders to minimize the impact on your credit.

4. Know Your Financing Options

Just as it’s important to shop around for a car, it’s equally important to know your financing options. Getting preapproved with lenders before you go to the dealership can help you avoid paying too much for a vehicle because of high interest rates.

Dealerships also often offer manufacturer-sponsored low-rate or incentive programs that can make a new or used car more affordable. However, these offers typically require a larger down payment or shorter contract terms.

Be sure to consider the total cost of a loan — not just the annual percentage rate (APR). A longer term can lower your monthly payments, but you’ll end up paying more in interest over time. If you choose the shortest term that fits your budget, you can save hundreds or even thousands in the long run.

5. Know Your Options

There are many factors that influence how much you will pay for your car loan. Understanding them can help you make informed decisions as you compare financing options.

Some lenders require specific loan terms for subprime or poor credit buyers. You might also find lenders that exclude certain car brands or types from their financing programs.

Annual percentage rate (APR): This measures the total cost of the loan, including interest and fees. It’s a good idea to use APR when comparing offers, as it can give you a more complete picture of the costs associated with each financing option.

Loan duration: The term of the loan determines how quickly you will build equity in your car. A longer loan term can increase your monthly payments but can also lower the overall cost of your car.

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