5 Car Loan Basics You Should Know Insurance overview
Understanding a few key basics can help you make a good decision about borrowing money to finance a vehicle.
With the exception of a mortgage, a car loan is the most money most people borrow at one time. Still, many people may not think much about funding their new ride until they walk into the parking lot. Check out this cheat sheet before you even start your car search.
1. Credit rating – Dealerships sometimes advertise extremely low interest rates which are usually only available to buyers with exceptionally high credit scores – often 800 and above. You may be able to get your credit score for free on one of the credit reporting agency’s three websites. Also check your credit card provider’s website, as they sometimes provide free credit scores. In general, the lower your score, the higher your interest rate can be. If you currently have a lower credit score, you have several options: apply for credit to see if you’re approved and at what rate (you can try refinancing at a later date to get a lower rate), delay your purchase and try to increase your score over time, increase the down payment to reduce the loan amount, or consider a co-signer.
2. Pre-approval – Getting pre-approved from a lender can help you set realistic expectations about how much car you can afford. Whether you are buying a new or used car, you will be in a better position to negotiate the price and financing terms.
3. Loan term – Some buyers opt for a 72-month or even 84-month loan to minimize monthly payments. But there is a flip side to this: it usually means paying more interest. In fact, according to Nerd Wallet, a borrower can expect to pay almost three times as much interest over a 72-month loan compared to a 60-month loan. Use an auto finance calculator to see the differences in loan terms.
4. Rate vs. incentives – Some dealerships may offer the option of an extremely low interest rate or cash back, but not both. And it’s not immediately obvious which is the best deal. Use an online calculator that compares low APR to cash back to help.
5. Protection against deviations – You will be responsible for keeping your loan agreement, whether the money you receive covers everything or not. This is why you might want to consider GAP (Guaranteed Asset Protection) insurance, so called because it covers the gap between what you owe on the vehicle and its current market value.
State Farm® Insurance Agent
Rebecca Stutts Hovater
501 S Montgomery Ave., Suite C, Sheffield
email: [email protected]