While you can still walk into a bank, credit union, or dealership to apply for an auto loan, there are also options available online. No matter how you apply for auto financing, this section of our guide to auto loans can help you as you shop.
Understanding Your Auto Loan Budget
You should begin any auto loan application process with clear knowledge of your budget. Experts caution against spending more than 20 percent of your take-home pay on your vehicle. If you can, keeping your car expenses to 10 percent of your take-home pay is ideal.
In addition to loan payments, gas, maintenance, insurance, and other car expenses all factor into that calculation. If, for example, you take home $2,800 per month, keeping your monthly car expenses to about $280 is a good goal.
How To Use An Auto Loan Calculator
Many lenders offer auto loan calculators to help you determine how much of a loan you can afford. These tools can help you budget by using different down payment amounts, loan terms, and interest rates to show what you’d pay in interest. Some loan calculators can estimate your interest rate based on your credit score.
Preapproval Vs. Prequalification
Preapproval and prequalification seem like similar concepts, but it’s important to learn the distinction between the two.
Preapproval happens when you apply for financing and the lender then does a hard credit pull and offers you an auto loan. Because preapproval requires a hard inquiry, it will temporarily hurt your credit score. However, being preapproved makes you look like a cash buyer, which gives you more leverage when negotiating with a dealer.
Prequalification is simply a financial institution’s estimate of the loan amount you might qualify for. Because you wouldn’t have applied for a loan yet, prequalification only uses a soft pull, which doesn’t affect your credit score. Being prequalified can help you plan your budget. It’s not a loan offer.
How To Compare Auto Loans
As with shopping for car insurance or an extended car warranty, it’s a good idea to compare loan offers before accepting one. If you apply for multiple loans within a short time period, your credit score won’t suffer too much. Once you’re committed to financing a car, it’s worth comparing several loans to find the right fit.
When comparing auto loans, look through all the fine print and disclosures for the following information:
- Late or missed payment fees: If you pay late or miss a payment, some lenders will charge you either a flat fee or a percentage of the monthly payment.
- Ease of use: When you sign a loan contract, you’re also entering into a months- or years-long relationship with a lender. Some lenders make it easier than others to pay your bill and manage your account online or with a mobile app.
- Required insurance coverage: Some lenders will require you to carry collision insurance, comprehensive insurance, and guaranteed asset protection, also known as gap insurance.
- Prepayment penalties: Lenders make their money from the interest on monthly loan payments, so they may charge a fee if you pay your loan off early.