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The ins and outs of getting an auto loan

Date posted:  8/2/16 09:00:00 AM

Buying a car is a process that isn't typically completed in one day, let alone one week.

From finding the make and model you want, to figuring out how you will finance the vehicle, it may take some time before you are sitting in the driver's seat of your new car. But before you start looking at specific models, you'll want to know how you'll finance the car.

When buying a used car, you might be able to purchase it outright if you have a enough cash in savings. However, in most instances, newer and older vehicles require you to take out an auto loan.

Before you head to the nearest bank to take out any auto loan, there are some important caveats to know.

Explore your choices
It's never good advice to always go with the first auto loan option you're presented with. Per the Consumer Financial Protection Bureau, exploring your loan options can help you save money in the long run.

At the start of the process, you'll want to add monthly payments for the auto loan into your budget. According to a study from Experian Automotive, during the second quarter of 2015, the average monthly payment for a new car was $483, while the average payment for a used vehicle was $361. Additionally, many consumers finance an average of just under $30,000 when purchasing new vehicles. For used cars, drivers finance an average of about $10,000.

At the very least, you can expect to add several hundred dollars of bill obligations into your monthly budget by purchasing a vehicle. Don't forget to factor in other associated costs you'll have to pay at the time of purchase, such as taxes, and fees for titles and dealers. And when you get a car, you can't forget about gas, maintenance costs, insurance and registration fees.

Owning a car is a big financial commitment and not all expenses will be covered under the auto loan. If you find that potential monthly costs will put too much of a strain on your budget, take a few steps to make it more affordable.

Make things cheaper
To better suit your budget, you can first look at buying a less expensive car, whether it's from another manufacturer, or if you choose to go the used route. Purchasing a used car can be a smart option for a lower monthly payment and reduced auto loan debt. Depending on your needs, a car that gets you from Point A to Point B is typically the most important aspect of a vehicle purchase, not all the bells and whistles.

If you have your heart set on purchasing a new car, see if you can reduce the number of features your car comes with. For example, you might want to cut back on a rear view camera that helps you park. Instead, you can opt for a sensor that helps guide you as you back into a parking spot, which may reduce the sale price. Similarly, forgoing luxuries like heated seats may shave off some of the final cost.

Additionally, a simpler radio is a less expensive choice than one of the newer models that incorporates Apple Carplay or Android Auto. If you prefer to stream music from your phone, make sure the system comes with Bluetooth so you can still wirelessly play music and drive hands​-free if necessary. At the very least, you can ensure the radio comes with the option to plug in an AUX cord so you can still play music from your phone.

Getting the loan
Now that you've settled on your budget, it's time to go shopping for an auto loan. Contact your bank or other financial institutions to start the process and to determine some  estimates of what interest rates you qualify for.

Rates will be factored in part by looking at your current credit score. Depending on the bank you use or your credit card provider, you might already be provided with monthly credit score updates. The better your credit score, the most likely it may be for you to qualify for a lower interest rate on an auto loan.

Focus on paying your monthly bills on time and lowering your credit utilization to help your credit score gradually increase.

Additionally, try to rate shop in a relatively short period of time, the CFPB recommended. Every time you apply for an auto loan, lenders will check your credit score. In a short time span, your score will not be negatively affected. But over a period of a few months, you will notice your score decline.

During this process you might find it beneficial to get pre-approved for an auto loan before you step foot at a dealership. This way, you'll know exactly how much you can afford and what your rates will be.

By knowing your limits, you can then have more success when negotiating the final sale price with a dealer.

Buying a car takes time. Part of the process is to secure financing and determine payment amounts that ensure you aren't overwhelmed by a car purchase. By understanding the ins and outs of auto financing, you'll know what to look for when shopping for an auto loan and purchasing a vehicle.