Shopping for a new or used car should be an exciting process, but it’s often fraught with confusion, indecision and even a little bit of fear. One of the biggest uncertainties is figuring out how to get a car loan.
What Exactly is a Car Loan?
If you’ve ever thought about buying a car, you’ve probably also discovered that you’ll likely need a car loan to help you with the purchase. Most of us don’t have enough cash to buy a car outright. A car loan is simply the money you borrow to help you purchase your car or truck. Applying for a car loan means that the financial institution will look at your credit – as well as other factors like your income, how long you’ve been employed, and your other financial obligations – to determine if you’re someone they want to lend money to.
Here, we lay out four simple steps to help you understand how to secure your car or truck loan.
Step 1: Understand Your Credit
All financial institutions will use your credit report to determine your eligibility for a car loan. Your credit will also determine your interest rate and, thus, your monthly payment. The better your credit score, the more likely you are to get a lower interest rate. It is important to have a good idea of what your credit score is before you apply for a car loan, and to be certain that your credit report is accurate. Watch this brief video to better understand what your credit score is and how it’s impacted.
Step 2: Know Your Budget
It’s easy to get tempted by your dream car, but the bottom line is you can’t buy more car than you can afford. Create a budget to determine not only what you can afford for a down payment but also what you can afford for a monthly payment. Be honest about your spending, and when you’re adding in the cost of your new car, don’t forget to include the cost of ownership (routine maintenance, car insurance and gas). Need help creating your budget? Download our free budget tool.
Use the calculator below to help estimate your monthly payment.
Step 3: Consider Pre-approval
Getting pre-approved for your car or truck loan means you’ve already lined up your financing and know what the maximum loan amount you can get is, as well as the interest rate. This is advantageous for a couple of reasons. First, it gives you the benefit of knowing exactly how much car you can afford, helping you to narrow your search to only those cars or trucks. Second, it allows you to focus your discussions at the dealership. If, for example, you’re interested in specific features, knowing exactly how much you can spend will help you engage in purposeful conversations with the dealer. If you’re ready to apply for preapproval, you can apply anytime from your laptop or mobile device! Click here to get started.
Step 4: Where to Finance
You have a choice when it comes to where you go for your car loan. Be sure to look at your local credit union as a viable option. Credit unions are owned by the members that bank there, meaning they turn any profits into advantages like lower interest rates for members - rather than turning profits over to stockholders. They also offer the benefit of earning dividends (similar to earning interest) on your savings account as well as close ties to the communities they serve.
Want more guidance on buying your car or truck? Download our free Drive Away Happy eBook!