With the exception of purchasing a home or paying for an education, buying a car is one of the biggest investments that you’ll ever make. There are mistakes that many people make when buying either a used or new car that can put a huge dent in your wallet. Given the potential impact on your budget, it’s important that you understand auto loans.
1. Your Credit Score is Very Important
Did you know that you can receive a free copy of your credit report each year form annualcreditreport.com? If not, this is great news because you should always know your credit scores. Why? Because it’s the most significant factor in determining the kind of auto loan you can get when financing a car. The interest rate that you receive will determine the overall cost of the vehicle. Simply put, the higher your credit scores, the less you’ll pay for a vehicle since you’ll probably qualify for a better loan.
There are different credit bureaus used to obtain your credit scores, so it’s a good idea to inquire from the car dealership which credit bureaus they access. It will likely be a combination of Equifax, Experian and TransUnion.
2. Applying for a Loan Affects Your Credit Score
Whenever a lender checks your credit, it causes a slight drop in your credit score. Although the amount in which your score decreases is minimal, it’s still something that other lenders recognize as a potential problem. For instance, if you’re in the market for a car and you submit more than one application, it can affect your credit each time.
To minimize the impact of credit inquiries from auto loan applications, it’s recommended that you submit all applications within a two-week period. This will reduce the affect that it has on your credit score by lumping them together as one event. It’s better than having different inquiries over a period of a month or more.
3. Getting Pre-Approved Changes Everything
It’s not uncommon to make a snap decision about buying a new car. The lure of a new vehicle is undeniable, but the cost of an unplanned purchase can be significantly higher than necessary. Instead of buying a car on a whim, it’s best to plan in advance. In fact, getting pre-approved by your bank is one of the best ways to get started. Having a pre-approval can make the car buying process more enjoyable because it’s like walking into a dealership with cash.
4. The Cost Might Be Higher Than You Think
Most shoppers focus primarily on the monthly payment when buying a new car. Since there are many factors that determine the amount of the monthly payment, such as the down payment and interest rate, it’s a good idea to play with the numbers before making a final decision. This will give you a chance to assess the total cost of the car so that you don’t end up paying far more than you anticipated.