Whether you’re seeking to purchase your first car or you’ve worn out that old jalopy you were given at sixteen, there are a few things to know to prepare for your first auto loan. Any loan is worth researching, but an auto loan requires a few things that others may not.
Know Your Credit Score
When applying for an auto loan, the lender will pull your credit score. The lender will use this to help determine whether you qualify for a loan or not. First-time auto loan borrowers may not have much credit history, this can affect their score and ability to qualify for an auto loan.
If this is the case, look for a credit union that offers auto loan programs that cater to those with no or low credit. Also, by getting pre-approved you are in a better position to negotiate price at the dealership, costing you less in the long run.
Save for a Down Payment
Purchasing a vehicle will require a down payment. It’s possible that a loan will cover the initial down payment but in order to save in the long term and to get the best price on your vehicle, paying out of pocket is best.
Saving for a down payment should be part of a short-term savings plan. We always recommend having an emergency, short-term and long-term savings account. If you don’t already, start putting away a percentage of your income each month and dedicate that account to your down payment. Typically, your down payment will be 5 percent of the total purchase price of the vehicle.
Know Your Loan Details
The terms that come along with an auto loan can be extensive. Before putting your signature on anything, go through the terms with your lender. The average auto loan is about 60 months in repayment time. Something that many borrowers don’t consider though, is that these terms may come with a pre-payment penalty if the loan is paid off before the end of the term.
Prepare Documentation
Like most loans, you will need to provide specific information like proof of income, residence, and identity. Something else to consider is that state law requires car insurance so you may need to provide proof of insurance when applying as well. These are all requirements that will vary by lender. It’s likely that the basics will be required but research your lenders and communicate with them about what they will need from you during the application process.