Getting an auto loan is not like picking up some milk at the grocery store. You can't just run in, grab a gallon of cash, and run out. You need to take a careful look at your finances and auto options before you begin shopping for a loan.
Boy Scouts love to "be prepared" when they head out on a camping trip. They know that packing the right supplies is a critical part of surviving in the wilderness.
Before you start shopping for an auto loan, you also need to be prepared. An auto loan is a huge financial transaction, and if you make a mistake, it could stick with you for many years. Use the following four tips to ensure you survive in the world of auto financing.
1. Analyze your budget
Lenders will be happy to lend you more money than you really need. To make sure that you borrow the right amount, create a budget. Write down all your sources of income and your expenses, making sure to include any upcoming purchases or lifestyle changes that could impact your finances. By creating a thorough budget, you'll have a good sense of how much you can afford to spend on a car.
2. Research the cost
Once you've got a good idea of how much you can spend on a car, analyze how much the vehicle will cost. Be careful: The expenses include more than just the purchase price. You'll also need to consider insurance, fuel, maintenance, and interest charges. Make sure that the overall cost isn't more than 15 to 20 percent of your total budget.
3. Check your credit score
Make sure that your credit report doesn't have any mistakes before you shop for a loan. Any erroneous reports of late payments and open accounts can lower your credit score and impair your ability to get a good loan. To obtain a credit report, contact any of the three credit reporting agencies (Equifax, TransUnion, and Experian). Examine the report carefully, and immediately notify the agencies of any discrepancies.
4. Compare new vs. used
Choosing between buying a new or used car will affect the size of your loan. A new car will be much more expensive than a used one-and unfortunately, it will also depreciate much more quickly in value. However, you may decide that the additional cost is justified if you place more value on the latest safety and convenience features of a new car.
There are many other pros and cons to both sides of the new vs. used argument. Be sure to choose the option that best aligns with your budget and your tastes.
Before you get ready to start hunting for an auto loan, heed this advice: Failing to prepare means that you're preparing to fail. Use the information listed above as you carefully analyze your own financial situation. In the end, you'll emerge prepped and ready to find the right auto loan.