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Best car loans | the ascent

Best car loans |  the ascent

What you need to know about car loans

Buying a car can be complicated. The first step is determining how much you can afford and how much you want to borrow. It comes down to your budget, preferences and looking at the total cost of purchasing a car. It’s important to balance your needs and wants so that you don’t borrow more than you can afford.

The Annual Percentage (APR) tells you the annual cost of your car loan. Your loan interest is expressed as a percentage, like an interest rate. It generally includes all costs associated with your loan, such as recurring and one-time costs.

How much car can you afford?

Everyone’s budget is different, but a rule of thumb is to keep your monthly car payment at 15% or below your after-tax income. Keep in mind that the total cost of buying a car includes not only the monthly loan payment, but also any sales tax, insurance costs, gas, annual registration fees, and maintenance and repairs. Parking can also be an additional expense.

For example, if your salary is $50,000 per year, 15% would be $7,500 per year or $625 per month. Based on your location, driving history, car type, and other factors, your monthly car costs could be:

  • Car payment: $300
  • Car insurance: $90
  • Maintenance: $50
  • Fuel: $60
  • Total monthly cost of car ownership: $500

You can get an insurance quote before buying the car and check the gas mileage to estimate your costs. After you’ve done your research, know how much you can afford and what type of car to buy, the next step is to look for the best car loans.

Get your car loan pre-approved

Before going to the parking lot, you must first get a pre-qualified or pre-approved loan. This can give you something to hold on to when it comes to negotiating. Dealers will try to offer you financing, but may not offer the best rate. You also know how much car you can buy. The temptation to upgrade to the latest bells and whistles can be great, so having the amount pre-approved can help you stay within your budget.

Dealers tend to take people with a pre-approved loan more seriously because they know they’re ready to buy a car, as opposed to someone who’s just window dressing. Many financial institutions or lending platforms will approve your loan the same day you apply.

Information you need to apply for a car loan

When you apply for a car loan, you usually need to provide the lender with your salary and employment information, the amount you want to borrow, and your housing information. The lender will check your credit score. Your approval and interest rate will depend largely on your credit score and history. If you have bad credit, you can offset the higher cost of a loan with a larger down payment or shorter loan term.

Since the vehicle price is also taken into account, the conditions depend on the vehicle you choose. It’s important to know that when financial institutions advertise low interest rates, it’s usually for those with the best credit scores.

Once you start applying for car loans to find the best rates, the lenders will do a hard search on your credit report, which will hurt your score. However, if you apply for loans within a two-week period, the credit bureaus will count them all as one application. It is important that you submit your applications to several lenders during this two-week period.

Balance your loan terms with your budget

Usually the following applies: the longer the term of your car loan, the higher your interest rate. If you get a loan with a shorter term, you pay less interest, but the monthly amount is higher. Look at your budget to find an affordable monthly payment that balances borrowing costs.

Some financial institutions allow you to add up any sales tax, title, registration, or even warranty fees in the car loan. This increases your loan payment. Be careful that your loan does not become “upside down”. With extra costs rolled into the loan, you could owe more than what the car is worth.

Your final loan amount will depend on the purchase price of the car, minus the total down payment you make, and the cash value of your current car if you plan to sell or trade it in. Here you will find more information about these conditions:

Trade in value

The value of your current car is deducted from the price of your next car. The dealer is essentially buying your car from you. The trade-in value is usually lower than when sold on the private market.

Deposit

You can choose to prepay as much or as little as you want. The more you put down, the less you have to borrow, potentially lowering your monthly payment. Some lenders require a minimum deposit, depending on the car.

loan term

This is the time you need to repay your loan. This affects your APR and how much interest accrues over the term. A shorter loan term may lower your costs in the long run, but it will likely increase your monthly payments. The loan terms depend on the bank or credit union. They are generally 36 months, 48 ​​months, 60 months and 72 months. Some financial institutions offer loan terms of 84 months or 7 years.

Equity

This is the value of your car after any outstanding debt has been deducted. If you owe $5,000 on a $10,000 car, your equity is $5,000. The amount of equity you have in your car can affect your refinancing rate. Some lenders will not allow you to refinance a vehicle if your equity is too low.

Different types of car loans

The rates depend on the type of car loan you get. New car loans are usually for brand new cars or cars under a certain mileage or car year. A used car loan is for a used car under a certain year or above a certain number of kilometers. Used car loans generally have the highest interest rates due to depreciation and lower prices than new cars. Used cars also have more mechanical problems.

If you already have a car loan, you can refinance your car to get a lower interest rate. Refinance loans usually have the lowest interest rates. It makes sense to refinance your car if you had bad credit and your credit score has improved since then. Some lenders will not refinance a car that is too old, has exceeded a certain mileage or value.

The last thing that is used for a car loan is buying off a car lease. A lease buy-out loan gives you the opportunity to buy your current lease car. You can use the loan to buy your car at the end or before the end of your lease contract.

Your car is collateral

A car loan is a type of secured loan. If you default on your loan, the lender will take the car back as collateral. It will then try to sell the car to make up for its losses. Since a car loan is a secured loan, they offer better rates than unsecured loans such as a personal loan or credit card. If you sell the car or trade it in for an upgrade, you must repay the remaining balance of the loan.

It often happens that people buy more cars than they need. Once you’ve checked your budget to find the optimal total cost you can afford, do your research and shop around to find the best car loans. Online banks and credit unions generally have better rates than physical banks. By getting a pre-approved loan, you can find the best rate available and have better bargaining power with the dealer.