Here are five questions to ask before you accept car financing terms and sign on the bottom line:
1. What Is Your Credit Score?
If you got this far and are ready to sign the new car loan papers, you probably have a good idea of what your credit score is. If you don’t, make sure you ask. Typically, a dealer or financial institution will share it with you up front upon approval, but you want to make sure your score matches your auto loan rate. There are many factors in how your rating is determined. How much credit history you have, the types of loans, how much you owe, late payments, debt to income ratio and more. Your score will be higher or lower depending on how well you manage, or have managed, your finances.
2. How Will Your Credit Score Impact the Terms of Your Loan?
Obviously, the higher your score, the better your rate and terms. To get the lowest available auto loan rate, you’ll need excellent credit. Depending on which credit agency or scoring system the lender uses, a 750+ credit score will get you the best terms. The interest rate offered will go up if your score is lower. If your score is low, the dealership will require more money up front and charge a higher interest rate. You can, however, refinance your auto loan if you’ve improved your credit since buying a vehicle. Refinancing can get you a lower rate and and save money. Bottom line, it’s imperative to know where you stand before you sit down at a desk.
3. What Is the Interest Rate on the Loan?
This is the first question that most people ask about a new car loan. While it’s also one of the most important, the terms of the interest rate are sometimes more crucial than the auto loan rate itself.
When you are calculating the interest rate on your auto loan, you should also factor in the following.
- How often is the interest rate compounded? An annual interest rate of 5% compounded daily has a far different impact than an identical auto loan rate that's compounded once per year.
- How is the interest on the loan amortized over time? Are the first few year's payments devoted solely to the interest, or are you able to pay off some principal as well?
- Does the interest rate change if you miss a payment? Some lenders will try to sneak in terms that raise the interest to the maximum legal amount if you miss even a single payment on a new car loan.
4. How Does Down Payment Work?
Making a small down payment will result in paying more interest over time. A large down payment, on the other hand, can make a huge dent in your savings. There are trade-offs to consider and either option may work best for you. If you get a very competitive rate with no prepayment penalty, it’s often fine to make a smaller down payment and pay down extra as you go! Overall, you want to use your down payment to help minimize interest or payments without putting undue strain on your current finances.
5. What Are the Repayment Terms of the Loan?
Auto loans are relatively simple. You borrow money for your vehicle and make monthly payments over the life of the loan until you own the vehicle outright. But what if you want to pay off your loan early?
Make sure there is no prepayment penalty. It’s actually rare to find an auto loan with a prepayment penalty these days, but you should find out for sure. And if there is a prepayment penalty, it’s a definite red flag. A prepayment penalty, or prepayment fee, allows the lender to collect scheduled interest on the loan, regardless of when you pay it off. In addition, car loans are often structured so that the majority of your monthly payments are first applied to the interest. If you have one of those loans, then you may not even be allowed to pay down most of the principal until several years into the loan.
Understanding the repayment structure of your new car loan is the mark of a truly educated consumer, so take the time to go over the details before you sign on the dotted line. Whether you have an A+ credit score or an average one, it’s important to shop around for the loan that works for you. Before you accept any form of car financing, you always want to make sure that you know exactly what you're getting into.
If you have additional questions on selecting the best auto loan for you, Truliant Federal Credit Union can help. We will help you understand your credit, review loan options and go through everything with you – from rate to the fine print. Schedule an appointment to discuss a credit union auto loan.