Financing is a central part of most car purchases, and the terms of the loan can have a strong bearing on how you feel about the overall buying experience.
Understanding the factors involved will enable you to plan your budget and get you ahead of the game. Here are five important points to know about.
Credit score
Your credit score is based on the credit history contained in your credit reports and sums up how creditworthy you are. It’s a key reference for lenders in determining how much money they may be willing to lend and what conditions it should come with, such as rate of interest.
Ability to repay
Lenders have an interest in making sure customers are able to pay for the vehicle they’re trying to buy. They do this in several ways, including evaluating your current debt as it’s reported to the credit reporting agencies. Another way lenders can evaluate your ability to repay the loan is by comparing the payment of the vehicle to a customer’s stated income on their credit application. The higher the percentage, the harder time the customer could have repaying their loan.
Size of down payment
Money down can have a clear effect on your auto loan. It can be used to reduce your loan amount, which equals less risk for the lender. It also suggests you’re less likely to stop making payments and risk losing the car, along with the money you put into it up front. Lenders (and dealers!) sometimes refer to this as having “skin in the game.”
Length of loan
The amount financed will be divided up into monthly installments to be paid back over a number of years. The length of that period, along with APR, will dictate the size of your car payment. You can get a good feeling for how this works – and what may work for you – by using a loan calculator like the Drive® Budget Customizer once you’re pre-qualified.
Age of vehicle
It may seem confusing at first, but new cars are associated with lower-rate loans than used cars. The reason, again, is based on lending risk. In the case of a repossession, a new car has a higher resale value, enabling the lender to recoup more of its losses.
Get financing that meets your needs
Besides the main points we’ve covered, choice of lender will also affect a buyer’s auto loan and their purchase process as a whole. Consider getting a Drive® pre-qualification. It only takes a couple of minutes, and it doesn’t impact your credit score. Once pre-qualified, you’ll be able to use our Budget Customizer to see which cars are right for your budget.
