Figuring out auto financing can feel like a bit of a nightmare, but you can make life stress-free if you follow these tips for car shopping.
Buying a car with financing is one of the perks of having a good credit score, but trying to figure out the best option can feel like a bit of a nightmare.
But there's no need to stress if you go in prepared! Follow these tips to make sure that applying for a car loan is a stress-free experience.
1. Size up your credit
The stronger your credit score is, the better chance you have at getting approved for a loan with a relatively low rate that will save you money on interest. You'll feel that savings on a monthly basis with lower monthly car payments.
To give your credit some love before you apply, you can always report your rent payments using a service like CreditPop – plus, you can check your score for free with CreditPop and get a breakdown of all the different factors affecting it so that you can clean up your score before you apply for that loan.
2. Decide on the amount you can afford
To figure out how much you can comfortably shell out for a monthly car payment, start with a general budgeting best practice: write down all the monthly expenses you have right now.
Next, figure out exactly how much you have left to spend on a monthly basis. Make sure and leave yourself a little breathing room!
And be careful to factor in all expenses related to a new car. Leave enough room in your budget for insurance, fuel (either gas or electricity/charging if you're considering getting a hybrid), registration fees, and maintenance.
3. Understand the pros and cons of different loan periods
In general, the longer the period of a loan, the lower your monthly payment will be. That said, you'll also have to consider the fact that you'll pay more in interest over the lifetime of the loan.
Most car loans come in three- to six-year terms. The shortest length of a loan that still meets your budget is your best bet. The longer a loan period stretches on, the more your car will depreciate and the greater the chances are that your car loan will end up being "upside down." (That means that you'll owe more money on the car than it's actually worth.) Plus, a longer loan term means that you'll be paying interest on that money for longer.
4. Get pre-approved
While you can certainly try to get a loan on the spot at a dealership, it's almost always a better tactic to shop around first to get pre-approved for the best rate possible. Car dealers are most interested in getting you to walk out the door with a new car — not on saving you money by getting you the best rates possible. When you walk into a dealership armed with a pre-approved loan, it makes the whole process a lot quicker and simpler.
However, car dealers want as much of your business as possible, so it's worth letting them try to beat the terms of your pre-approved loan. Don't fall for any tricks, though — remember, longer loans do have lower monthly payments, but can end up costing you more over time.
5. Be speedy
It's definitely a good idea to compare and contrast car loans. However, make sure and do it all within a short timeframe.
Credit scoring models penalize you for having too many "hard" inquiries, which happen every time you apply for a new loan. However, most credit scoring models recognize a short loan shopping period of two weeks to a month. During this window, all your hard inquiries will count as one - so you have some time to figure things out. After all, they know that you're probably not going to buy multiple cars at the same time. Just make sure and wrap up all your loan applications within that timeframe, and you'll be okay.