Wants vs. Needs vs. Affordability.
Before purchasing a car, evaluate what you would like and need for a safe, reliable vehicle. Sure, the bells and whistles make your car fun, but are they worth the price tag?
If you are purchasing your new ride with a loan, crunch the numbers and make sure it will fit comfortably into your monthly budget. Be realistic and conservative when thinking about payment options as your financial situation could change at any time during the life of the loan.
TIP: If you have to forego saving to make the payment fit into your spending plan, you should think twice about the choice of vehicle and look for something with a lower price tag.
Know your financial situation before you apply for a loan.
This goes for all loans or credit cards! During your budgeting process, analyze your income and know your length of employment. You may also be asked for pay stubs or W-2s depending on the loan amount or type.
It’s a good idea to check your credit history prior to applying for a loan but know that scores projected on credit monitoring sites are estimates based on your current debt and borrowing history.
You may need a cosigner if your credit report has some room to grow. When asking family or friends to be a cosigner, remember that how you handle your loan also impacts their credit history. By being your cosigner, their debt-to-income ratio changes, their score is impacted, and they are held liable for the loan if you default.
When buying a new vehicle, be prepared to shop for cars AND rates.
As you do while shopping for a vehicle, do your rate research! People with a higher credit score typically get lower interest rates. If your credit score is suffering, you may have a higher interest rate or need a larger down payment to get funding.
You can get pre-approval BEFORE you select a vehicle!
Pre-approval can save you time and prevent disappointment. By getting pre-approved, you gain a better idea of your spending power. After you have rate shopped, contact your chosen lender to apply for preapproval and get your possible price range.
Once you find a car that meets your needs, call your lender with the VIN, make, model, and special features to see if it’s value and price meet your loan terms.
If you want to skip the preapproval process, that’s fine too! You can ask for your preferred lender at the dealership.
TIP: Be prepared to put more money down if the vehicle, taxes, and fees cost more than what was approved in your application.
Research your vehicle’s value before signing a purchase contract.
This goes for both your old and new vehicles if you plan on trading at a dealership. Your car’s age, model, mileage, and wear can factor into the overall value.
Some modified vehicles with add-ons made by a previous owner may not increase the collateral’s value. If this is the case, you may need to put more money down if the purchase price is higher than the value.
Put money down, even if you don’t need to.
Depending on your credit history and other factors, you may not be required to provide a down payment. If that’s your situation, it’s still best to put money down on the loan as long as it fits comfortably within your budget. This gives you the power to get a shorter loan term, smaller monthly payments, or both.
TIP: Don’t completely empty your savings to make a larger down payment than needed. You may need that money further down the road for repairs, maintenance or general emergencies.
Understand your collateral responsibilities.
A vehicle loan is considered a “secured loan.” This means that your loan is less risky, as it’s supported with a lien on your new vehicle. If you would default on the loan, your car could be repossessed. Once your loan is paid off, the lien is released and you have what is referred to as a “clean and clear” title. For more information, look closely at your loan documents before signing.
TIP: Ask your lender what type of insurance is required for the vehicle during the life of the loan.
Be thorough when you read the loan paperwork.
If there is something in the documents that you don’t understand or agree with, say something BEFORE you sign. Once you do, you are legally held liable for the loan amount.
TIP: If you are interested in any form of loan protection, try to ask before the loan documents are drawn. Even though it may increase your monthly payment, it could protect your investment in your vehicle. For more information, talk to your lender.