A car is a very expensive purchase. Since it’s not a one-time payment, it’ll greatly affect your finances or those of your loved ones. When you buy one, you can’t just forget about the other costs that come with it.
Even worse, you could put your family through financial difficulties if you don’t educate yourself properly and have a strategy in place. To help you avoid this, here’s a step-by-step guide to securing the right car loan.
Step 1: Know Your Budget
The 10–15% rule is a good starting point for finding a target car price that won’t leave you scrambling to pay your bills every month. For example, if you want to buy a new car, it shouldn’t cost more than 15% of your monthly take-home pay. If you want to buy or lease a used car, it shouldn’t cost more than 10% of your monthly take-home pay.
Using this rule to determine how much your car should cost won’t add up to your spending. You also have to consider the cost of gas and insurance, which may add 7% to your net pay.
Ultimately, your budget shouldn’t be more than 20% of your monthly after-tax income. Since this budget only includes 20% and other car costs, you probably won’t feel the pinch every month. However, remember the 10% to 15% rule (plus about 7% for other car costs) might not work for everyone.
Step 2: Do An In-Depth Research
Know what kind of car you want beforehand. However, if you’re a first-time buyer with a tight budget, focus on what you need first. This can help you pay less for your car and other costs, like gas, repairs, and maintenance.
Once you know your ideal car, you can start looking into it. When you research it, don’t just flip back and forth between books and websites. It’s recommended to take the car you want for a test drive and compare what different companies offer.
If you can’t go to car dealerships in person, you can look online. Some sites have better deals than stores that you can walk into. It is also much more convenient. The only problem is that you won’t be able to see and test drive the cars yourself.
Consider buying a used car if you want something practical and cost-effective. Don’t worry; second-hand cars are much better than they used to be! In fact, several car experts said that it’s their golden age now. Their dependability is so good nowadays that you could drive them for another hundred-thousand miles.
Check the best deals on used cars in the nearest car dealership in your area. You want to avoid certain car models, specifically European models, that are notoriously expensive to maintain. Don’t forget to read reviews and ratings of different car brands and models and choose used cars that are less likely to need expensive repairs in the future.
Step 3: Plan Your Dealership Visit Ahead
Don’t go into a car dealership without knowing what you want to do. If you don’t come prepared, you likely get sidetracked by all the bells and whistles, which may cause a huge hole in your bank account. Remember that you should never buy a car on the spur of the moment.
Additionally, when you plan to run your research at the dealership, avoid the following as much as possible:
• Early discussions of trade-ins – Don’t let a salesperson pressure you, and turn down as many offers as you can until you know how much your trade-in is worth and have the money.
• Leaving your car key and driver’s license – Staff at the dealership commonly ask for them before a test drive, but they shouldn’t be kept as a kind of deposit or security. If dealers take them from you, they’ll probably want to keep you in the showroom until a deal is made.
• Allowing the dealership to check your credit – If you want to get a loan to pay for your new car, the dealer must check your credit. However, this must only happen when you’re about to make a deal. If you’re still undecided, don’t allow them to make a hard pull. It’ll only hurt your credit.
Step 4: Get Loan Pre-Approvals
Before or after you go to the dealership, get pre-approved for a car loan from other financial institutions, such as banks, credit unions, or online lenders. Most of the time, these companies will tell you about your credit, including how good it is, your interest rate, and any problems with your credit that most dealerships will otherwise tell you about.
For example, if you plan to take advantage of CreditNinja Co-Signed Loans, the online lender, CreditNinja, will inform you whether you’re eligible for lower interest rates. In contrast, most dealerships will only give you a rate that’s even higher than what you qualify for—and unfortunately, they’re legally able to do this. That’s why you might pay the dealership thousands of dollars more in interest if you’re unaware of your current credit.
Overall, if you want to buy a car, you need to have pre-approvals in your hand. They can even be used as a bargaining chip with your dealership to get a better rate. For example, if you tell your dealer that you’ve been pre-approved at 4.5%, they can likely offer you 3.5% to make their deal more appealing than other lenders.
If, by any chance, the dealership’s rate is much better than other lenders’ offers, leverage it right away. Still and all, ensure that the loan terms, such as down payments and repayment terms, will stay the same.
Step 5: Finalize The Car Loan
The last step is to make sure that your ideal car loan fits your needs at the most affordable terms. Before you agree to the loan terms and sign the papers, prepare your proof of identity, residence, income, insurance, bank histories, and down payment methods.
Getting the necessary documents ready ahead of time could make getting a car loan easier and faster. Once you have finalized and signed everything, send them to your lender as soon as possible and await their updates. If you’re not approved, don’t lose hope and start from step 2 again.
Remember that buying a car is a big financial commitment. That means you have to expect car-related recurring expenses, including gas, car repairs and maintenance, toll and parking fees, auto loan payments (if you have your car financed), and car insurance premiums. Hence, avoiding taking on more than you can chew is important.