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Key Factors to Consider Before Getting an Auto Loan

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Is Auto Loan Your Best Option?

For most people, there’s not a question if auto loan is the best option, because sometimes, it’s the only option for them. However, if you’re one of the lucky few who actually can afford to pay for a car in cash, you should consider if buying it outright is better than taking a loan.

Review your credit

This is one main issue you need to cover in the initial phases of loan planning. If you’re not new in the personal finance world, you’ve probably heard that your credit rating pretty much determines the success or failure of every financial move you make, especially if there’s borrowing money involved. 

You can start by requesting for your free credit report, and checking all entries for errors. Something as simple as a misspelled name can cost you a good credit score. Make sure you check if everything is correct and report mistakes. Meanwhile, if you have past dues, take the time to pay them off to improve your rating a bit. Also stick to paying your other bills on time to avoid lowering your score. Once you’ve figured out your credit profile, it would be easier to assess what type of deal you are likely to get.

Determine how much you can spend

Not everyone is skilled in budgeting their finances, especially if something as huge as car payments would add to the bill. You should never assume that you can afford the repayments, but rather, work out on your budget and prepare an exact estimate. List your income, expenses, savings, and give allowance for emergencies. It pays to know in advance what would be left of your disposable income so that you won’t accidentally agree to a loan term that you cannot afford in the first place.

Calculate up to the very end

Common mistake borrowers make is failing to look at the bigger picture. For example, you might choose a low down payment because it is convenient for you at the moment, or perhaps you’ve opted for lower monthly payments without considering the duration of the loan. In most cases, low down payments will leave you at risk for upside-down loan, and the lower monthly payments translate to longer duration, which means you will have paid for more than what is necessary.

Inquire about insurance

It is a fact that owning and driving a vehicle requires you to have an insurance. Most lenders will offer them to you too, however, it may not always be beneficial including insurance policy into the loan. Most of the time, you can find cheaper and better coverage outside of the contract.

Ask about prepayment penalties

Because you can’t predict life changes, one thing you should look for in an auto loan is flexibility. Make sure that the contract will allow you to pay off the loan entirely without penalties, so that you can be loan free when the time comes that you can afford it.

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