Although owning a car was considered a sign of wealth around fifty years ago, it is now pretty much a necessity. You cannot be expected to run errands, pick up your kids from school, and reach work on time by depending solely on public transportation. Unfortunately, while cars have become commonplace, buying one, even if it is used, is still a hefty investment, and most people cannot purchase a vehicle on the spot using only their savings. That is why many people resort to taking out a loan to cover the cost of their new vehicle. However, jumping headfirst and committing to an auto loan when you do not have all the details is a huge pitfall you might encounter when looking for financing options.
To make a more informed decision, here are some mistakes you should avoid when applying for an auto loan.
Having a Bad Credit Score
No, we are not judging you for your past financial decisions, but you cannot expect creditors to grant your loan request if you have a bad credit score. Your credit score is a metric that lenders use to decide your creditworthiness or basically how much you are to be trusted with money. As you can guess, the lower your score is, the fewer options you will find when applying for a loan. Most financial agencies have several ranges your credit score can fall within. For example, FICO, the most well-known score brand adopted by the majority of lenders, has 4 ranges: excellent, very good, good, fair, and bad. If the creditor you are choosing uses this rating system, then a credit score of 670 or above should be sufficient. To stay on the safe side, make sure to check the system the creditor you are dealing with adopts, as there might be some slight differences that may put you in another category altogether. We also recommend that you pay any late credit card or loan installments to boost your score.
Choosing a Long-Term Deal
Before you submit your application, you need to ask around about the payment options you can get. Just like any other low interest personal loan, an auto loan can be either short-term or long-term, which is why extending your loan may be tempting. We get it; when you are struggling to make ends meet, a long-term contract might seem like a good idea. However, you know what they say, “hindsight is 20/20”! So, take it from the millions of people who have taken out long-term loans before; the small monthly installments are not worth it. The longer your payment period is, the bigger the overall cost is going to be, regardless of how competitive the interest rate you are getting seems at first. So, stick with three-year loans if possible, and avoid five to seven-year ones.
Not Caring About Interest Rate Types
A 4% variable interest rate? It does not get better than this, right? Well, not exactly. Interest rate varieties can be a bit tricky to understand and you may end up making a huge mistake and costing yourself a lot of unnecessary expenses if you are not careful. Generally speaking, there are two types of interest rates you can find: fixed and variable. As the name suggests, fixed interest does not change throughout your payment period as opposed to the variable rates that are subject to economic fluctuations. If the economic situation is especially turbulent, the annual percentage rate (APR) you will have to cover may skyrocket suddenly, causing you to miss your installments and drown in debts. This is why we recommend choosing a loan with fixed interest; at least, you will be aware of what you are getting yourself into!
Settling for the First Creditor you Can Find
Being in a hurry to get your loan will certainly not help you find the greatest deal on the market. Often, applicants become too desperate to get their loans right away, which makes them end up with sketchy lenders. So, take a deep breath, do your research, and curate a shortlist of the best creditors on the market. Then, take a look at their fixed interest rates and compare them. This way, you can ensure that you are not settling for less than the best!
Taking out a loan may just be the push you need to purchase the car of your dreams. Nonetheless, you must stay prudent throughout the whole process to avoid the mistakes we have mentioned. In addition to the pitfalls on our list, we recommend that you opt for a conventional lender instead of a dealership that offers financing options, seeing that the latter may oblige you to get extra insurance or coverage as part of the agreement.