What You Should Know Before Buying Your First Car
Buying a car is often your first big purchase as a young adult. It involves knowledge of financing, interest rates, and terms. If you go into the process with some knowledge under your belt, you will be less likely to be taken advantage of by predatory lenders and you can save a lot of money in the long run.
You may have found the perfect car at the perfect price but now comes the hard part: finding the right source of financing for your auto loan. If you or your family is a regular customer of a credit union or bank, you may want to start your loan search with that financial institution. Although many car dealers will encourage you to use their auto financing, your own financial institution may offer better rates.
Questions to Ask
There are several questions that you will want answered in your quest for an auto loan:
- What is the interest rate?
- How long would the loan be for?
- Is there is a grace period, which is a period of days after the due date that you can still make your payment without incurring a late charge?
Most of the time, you will hear a range for the interest rate answer. That’s because the interest rate, which is the annual rate charged by a lender, usually varies from one customer to another, depending on your credit score. Another factor is whether it is a variable or fixed interest rate. A variable rate allows the lender to charge an interest rate that reflects current market conditions. A fixed rate does not change throughout the duration of the loan.
Questions to Answer
What are the questions lenders will ask you? Think about this from their perspective. You are asking them to loan you money to buy a car. What are they trying to be reasonably sure of? Yes, that you will pay them back. So, they are going to need to gather as much information about you as possible, especially regarding your ability to repay the loan. They will get this information from two sources: the credit application you will fill out and from your credit report.
Information about you, including your address, your employer, and your history of paying back money you owe, is all reported to the three national credit reporting agencies: Experian, Equifax, and TransUnion. They collect the information sent to them, and compile it into what is known as a credit report. In addition, each agency summarizes this information and assigns a credit score to represent how likely you are to repay a loan. This score is based on factors such as: how much money you currently owe, how much unused credit you already have available to you, how reliable you are at making payments on what you owe, and how long you have had credit accounts. Credit scores generally range from 300 to 850, and the higher your score, the more people will want to loan you money! You will also be offered lower interest rates. Since you are just getting established in the credit world, you will either have a pretty low score, or because there isn’t enough information available about you, you might not have a score at all yet.
So, your credit report will give the bank or credit union some information about you. You will provide the rest of the information on your loan application. This information is, by the way, what gets reported to the credit reporting agency. The next time you fill out a credit application somewhere, maybe to get your first apartment, the information from this application is what will show up on your credit report. Always get a copy of anything you sign, including applications for a loan. It’s a good habit to get into!
Want More Help?
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