Car Loan Guide (2022)
While you can always go to a bank, credit union, or dealership to apply for a car loan, there are also options available online. No matter how you apply for auto finance, this section of our auto loan guide can help you with your shopping.
Understand your car loan budget
You should start any car loan application process with a clear knowledge of your budget. Experts warn against spending more than 20% of your take home pay on your vehicle. If you can, it’s ideal to limit your car expenses to 10% of your take-home pay.
In addition to loan payments, gas, maintenance, insurance, and other car expenses all factor into this calculation. If, for example, you bring home $2,800 a month, keeping your monthly car expenses to around $280 is a good goal.
How to use an auto loan calculator
Many lenders offer car loan calculators to help you determine the amount of a loan you can afford. These tools can help you budget by using different down payment amounts, loan terms, and interest rates to show what you would pay in interest. Some loan calculators can estimate your interest rate based on your credit score.
Preapproval Vs. Prequalification
Pre-approval and pre-qualification seem to be similar concepts, but it is important to learn the distinction between the two.
Pre-approval occurs when you apply for financing and the lender then proceeds to apply for firm credit and offer you a car loan. Since pre-approval requires a thorough investigation, it will temporarily affect your credit score. However, being pre-approved makes you look like a cash buyer, which gives you more leverage when negotiating with a dealership.
Prequalification is simply an estimate by a financial institution of the loan amount you may qualify for. Because you wouldn’t have applied for a loan yet, prequalification only uses a soft approach, which doesn’t affect your credit score. Being prequalified can help you plan your budget. This is not a loan offer.
How to Compare Auto Loans
Like with buy car insurance or one extended car warrantyIt’s a good idea to compare loan offers before accepting one. If you apply for several loans in a short period of time, your credit score will not suffer too much. Once you have committed to finance a carit’s worth comparing several loans to find the right one for you.
When comparing auto loans, skim through all the fine print and disclosures for the following information:
- Late or missed payment fees: If you pay late or miss a payment, some lenders will charge you either a flat fee or a percentage of the monthly payment.
- Ease of use: When you sign a loan contract, you also start a relationship of several months or years with a lender. Some lenders make it easier than others to pay your bill and manage your account online or with a mobile app.
- Insurance coverage required: Some lenders will require you to purchase Collision Damage Waiver, Comprehensive Insurance, and Guaranteed Asset Protection, also known as insurance gap.
- Prepayment penalties: Lenders make their money from interest on monthly loan payments, so they may charge a fee if you pay off your loan early.