Cars. Everyone wishes to have one. Whether it be for commute, a status symbol, or a mark of success, cars are among the most prized possessions of many.
There has been a stable demand for cars for quite a few years. The revenue generated by Volkswagen alone is 279 billion USD. In 2020, according to Statista, the projected car sales are likely to be approximately 60 million units.
However, not everyone can afford to purchase their dream vehicles solely through their savings. This has given rise to auto loans. According to a study by the Federal Reserve, 35 percent of Americans used such loans to finance their automotive purchases.
If you are also considering buying a vehicle through a car loan, here are some essential questions you should ask before you make the decision.
- Do you need a new or used car?
This is a personal question you must get an answer to before opting for a life of debt. Considering the interest charged on loans, many advise people not to choose for a debt if they can avoid it. After all, you end up paying more for the item than its initial monetary value.
So, before getting a car loan, ask yourself if you genuinely need a vehicle that requires you to take a loan. If the reason for you getting a car is to merely commute from one place to another, you might want to consider cheaper alternatives in the form of used cars.
Many prestigious dealerships like redline cars in the UK offer such vehicles along with brand new ones. Compare the difference in price and condition and decide for yourself.
2. What is your credit score?
One of the critical metrics to deciding your loan terms and interest rate is your credit score. The credit score signifies, to the lender, your ability to effectively pay back the loan. Before visiting a car dealership or bank for an auto loan, make sure to check your credit score.
So, what signifies a good credit score?
Well, according to the Federal Reserve study, in 2019, car borrowers generally had a credit score of 717 for new vehicles. Over one-third of borrowers had scored over 760. For people purchasing used-vehicles, as per an Experian report, the credit score was 662.
The higher your credit score is, the more likely it is for you to get a car loan. But, low scores don’t necessarily erase your chances. In fact, 25 percent of loans were given to borrowers with scores below 600.
Remember that the credit score is not the only determinant of interest rate you will have to pay. But, it does influence it. You will also need a favorable lending history along with assets backing you to get the right deal.
3. What fees are associated with the car loan?
Many people think that interest rates are the only expense they need to bear when opting for a car loan. This is not the case. Many hidden charges come with loans that you must enquire about.
This includes expenses like registration fee, establishment fee, extended vehicle warranty, dealer origination fee, Guaranteed Auto Protection insurance, negative equity financing, state taxes, credit insurance protection, etc.
Don’t sign any contract before you understand each of these costs. There might be some you will have to pay and others you can avoid. Also, various dealership-related costs are added to the auto loan. This can include the delivery fee, floor plan fee, and advertising fee. Generally, such expenses are open to negotiation.
4. Is the interest rate offered, the best you can get?
Different lenders might offer you a varying interest rate on the car loan. It is imperative to understand if the asked rate is considered to be justifiable. For this, conduct research about the prevailing auto interest rates in your country and set a benchmark.
Here, you must remember that the rate charged for your debt will vary from the benchmark, depending on your credit score, previous credit history, etc.
But still, doing research and asking different dealerships and banks for loans can help you make an informed decision. Also, you must decide whether you want to have a fixed interest rate or a variable one.
A fixed interest rate remains the same, regardless of market conditions. But, a variable interest rate changes as per the discretion of the lender. A fixed-rate can seem like a risky option if you consider the speculative nature of the interest rate, whereby the value can go down in the future.
However, in the variable interest rate, there is always a risk of the rate increasing. So, unless you don’t mind such a risk, it is advised that you opt for a fixed rate for your long term car loan.
5. Can you afford it?
The last thing you would want to do is miss out on your loan repayments. Therefore, you must ponder whether you can afford to make timely repayments throughout the life of the loan.
Take into account your monthly budget and expenditure. Once you deduct the costs of the basic necessities, do you have enough left to make your payments? If you think that you will have to stretch your budget and reduce your expenses, this is the first red flag.
This is because it is always wise to leave a buffer in your budget for unforeseen circumstances. Your repayments are a fixed cost that cannot be changed. You must ensure that you have money after it to spend on emergencies.
So, plan ahead.
Verdict: Answer and decide
Answer the five crucial questions before proceeding with your car loan. If you are positive that you can afford the loan and it is the most convenient option for you to explore, go ahead and find the best deal.
Do your research on credit scores and interest rates. Look for a car that best suits your needs. Understand the different costs associated with it and negotiate the price. Secure a loan and purchase the vehicle of your dreams!
Let us know how it goes.