Second to buying a home, the purchase of a car will probably be your largest financial investment. Unless you will be paying for your vehicle with cash, you will probably need to finance a least a portion of the purchase. This entails making a loan application to a bank or credit union, the dealership’s financing department or another lending source. As with any other type of debt, it is important to be well prepared for your vehicle loan application.
Here are a few important things to do before you approach a lender for a car loan.
Save money beforehand
If you can put down a large deposit, you can considerably increase the approval chances of your vehicle loan application. You might also be able to obtain more favourable loan rates and terms. Therefore, before you apply for a car loan, it’s a good idea to save up as much as possible to use as your deposit. Our article on how to trick yourself to save more money can help you get started.
Review your credit report
Your credit score is used by lenders to assess your credit worthiness and to make loan approval decisions. Consequently, before making a vehicle loan application, it is a good idea to review your credit report and correct any errors that could either increase your borrowing costs or lead to loan denial. If your credit report has no errors but your score is low, it might be in your best interests to first work on improving your credit score. You are likely to get more favourable rates with a higher credit score.
Determine your loan budget
Before approaching a lender, it is important to establish the maximum loan amount that you plan to borrow. When determining what you can afford, focus on the total cost of the loan rather than the monthly payments. Unfortunately, many car buyers fall under the sway of lenders offering very low monthly payments. They overlook the fact that a loan with low monthly payments will be for a longer term. A longer loan term means more interest and thus a larger total cost at the end. This is why it is important to crunch the numbers first before making a vehicle loan application. Work out the total cost and interest that you are likely to pay to the lender and then decide whether it makes sense to you.
Conduct research on the kind of vehicle you want
With the wide variety of car brands and models available, it shouldn’t be too hard to find a car that fulfils your requirements. Of primary importance is that the car fits your budget. After this, you can consider other factors such as taste and lifestyle. Once you have established the budget, consider your desired specifications, including size, colour, performance and safety features. With this information, it will be easy to narrow down your options and make a choice. Once you know the model of car you want, it will be easier to compare prices and negotiate loan terms with lenders.
Get loan quotes
Before making a vehicle loan application, make sure you get quotes from a range of lenders including banks, credit unions and car dealerships. You are likely to find that loan fees, interest rates and even the terms from different lenders will vary dramatically. In addition, since you know what your credit score is, you can also do some online research using sites such as GoCompare and Uswitch to figure out the best loan rates available to you. Knowing what you potentially qualify for and then shopping around for the best deals might save you money.
Getting a loan is a great way to access the car you need without having to sacrifice all of your savings. The process of applying for a car loan can be challenging but with the right preparation, it becomes much easier. You can significantly increase your likelihood of getting the best possible deal for your car loan.
If you’re looking for more ways to make your money work for you, why not sign up for MyWalletHero’s email newsletter? You’ll receive our team’s top money-saving tips, lifestyle hacks and handy personal finance ‘must-knows’ – delivered straight to your inbox…
Just enter your email address below to sign up now:
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.