Car Loans and You
Having a reliable vehicle to drive is almost a necessity in today’s world. Whether it is to commute to and from work, school, or simply to have a social life at the end of the day, cars are an important part of our lives. However, when it comes to purchasing a car, there can be a lot of confusing terms and procedures. This is generally because cars are considered significant purchases (almost like a home), and done with the help of a bank loan rather than being paid in full with cash.
If you are looking into personal loans to finance a vehicle, there are some things you should know as you get started. First, obtaining a loan for a car is a pretty normal process and nothing to be afraid of. Currently, there are over 107 million Americans (43% of the adult population) who have car loans. While debt isn’t necessarily a good thing to keep around forever, it can be leveraged as a tool to help you get access to your first car, which in turn will help open up job opportunities for you. Here are some tips for financing your first car:
Tips for Financing a Car Loan
Know Your Credit Score (and build it up): Your credit score is probably something you have heard about, but maybe never really understood or paid attention to. Here is how it works. Credit scores are assigned to each person to essentially give them a “risk or no risk” rating to lenders. Low credit scores indicate a massive risk for lending to an individual, and it is usually difficult to obtain a car loan or other type of loan with a low credit score. If you are able to obtain one it comes with a very high-interest rate. Your credit score is based on past credit history. Because of this, some people are confused about how to start building a credit history. Start small. Open a small line of credit with your personal checking account. Maybe $200-$500. Start making small purchases on your credit line and immediately pay them off the same month. This will start building a credit history. You can check your credit score with FICO, the better your score, the better your rates.
Short Term Loans Save You Money: When financing a car, you will typically have the option to choose a 3 year, 4 year, or 5 year loan. The 5 year loan will obviously have the lowest monthly payments, however, this isn’t always the best option. Because you are stretching your payments out over an additional two years and paying the loan off slower, there will be a much higher amount of interest paid over time. If you have the means, start with the highest possible monthly payments. This will ensure you get your loan paid off quickly and with the least amount of interest accruing possible. If that isn’t possible for your situation and you need a lower monthly payment, that is fine too. Le average the long term loans to keep your payments down and save your money for other necessary expenses.
Time Your Loan Correctly: Just like home loans, a car loan will have interest rates that fluctuate based on current economic conditions. If you have the times, wait on getting a car loan until interest rates are at the lowest point possible. This will help save you significant money in the long run. Additionally, when it comes to car loans, be careful about what the dealership tries to tack on to the loan. Additional fees and taxes are necessary, however the “extended warranty” that costs several thousand dollars usually isn’t.
For Young People, Find a Co-signer: If you are young and still developing a credit history, having a co-signer on your loan is a great way to ensure the best interest rates possible. Having a co-signer on the loan uses their credit history to lock you into the best rates possible, because they are guaranteeing to make your monthly payment if you miss it. This is a big responsibility and a huge sign of trust from your co-signer. Treat it seriously and do everything you can to be responsible for your car loan.