If you’re in the market for a new set of wheels, you’ll likely need to get an auto loan. This loan will significantly impact your monthly budget for at least a few years, so it’s important to make an informed decision when it comes to choosing your auto loan. Here’s how to select an auto loan that best suits your needs.
Make an auto loan budget
Your first step when shopping for an auto loan will be to determine how much you can afford to pay toward the loan each month. Review your current budget and calculate how much you can realistically afford on a car without compromising on other fixed or fluctuating expenses. Be sure to include all ongoing costs of your new vehicle, like fuel and maintenance, when working this new expense into your budget.
Check your credit score
Next, check your credit score. These three little digits play a crucial role in the auto loan process. Lenders will use your score to determine your creditworthiness and eligibility for a loan, as well as the interest rate on the loan. If your score is on the low side, you may want to take some time to work on improving it. Pay all credit card bills on time and in full, keep your credit utilization low, and avoid opening new cards or credit lines now.
Shop for a lender
Choosing the right lender will make a big difference in your loan. You can choose from a private lender, a financial institution like a bank or credit union, or a loan offered by the dealership selling you the car. In the latter, they often finance you through one of their affiliate lenders, so they may choose one that benefits them more than it does you, so exercise caution. When researching lenders, look for the loan’s average interest rates, additional loan costs like origination fees, and the general terms and conditions of the loan.
Get prequalified or preapproved
Before shopping for your loan, you may want to get a prequalification or a preapproval. A prequalification provides a basic assessment of your eligibility for an auto loan, while a preapproval gives you a specific loan offer, including interest rates and terms. A preapproval can be a valuable tool for negotiating with dealerships and ensuring you stay within your budget.
Choose your loan term
Auto loans typically offer terms ranging from 36 to 72 months. Longer terms typically have lower monthly payments with higher overall interest costs. While shorter terms have higher monthly payments but lower overall interest costs. Be sure to choose a term that aligns with your budget and general financial goals.
Consider your down payment
A substantial down payment can reduce the amount you need to borrow and potentially secure a lower interest rate. It’s best to put down at least 20% of the car’s purchase price, so make this your goal, if possible. A larger down payment lowers your loan and minimizes the risk of negative equity.
Beware of add-ons
Be cautious about add-on products when financing. While some may provide valuable coverage, they can also add significant costs to your loan. Review these options carefully, and consider whether they are necessary for your situation. Whether these add-ons are worth it depends on the vehicle’s age, your budget, and other factors.
An auto loan will impact your monthly budget for years to come. Do your homework carefully, and make an informed decision about your loan.
TEGFCU makes it easy to get into your next vehicle. Our fast pre-approval process can get you on the road in no time. Getting pre-approved before you start shopping puts you in the driver’s seat. With a pre-approved loan, you can negotiate a better deal and get low rates. We even have relationships with many area auto dealers, so you can get financing from us right from the dealership! See our list of participating dealers.
