When you’ve decided you want to buy (instead of lease), financing your vehicle is a great option. With a little know-how, even a first-time buyer can secure a loan with a great APR. Before you drive off in your dream car, let’s take a look at the ins and outs of financing it.
Key Takeaways
- To finance your vehicle, you take out a loan for the amount of your new car and repay it over time, usually monthly, for a period between 36 and 72 months.
- Brush up your credit score before you apply for a loan, because a higher score means better loan terms.
- Shop around to prequalify for the best APR.
- When you find the loan that works for you, get preapproval for a set amount and start shopping for your new vehicle!
Financing Your Vehicle 101
Because vehicles are such a big purchase, financing is the most popular way to buy a car. When you finance your new vehicle, you’re simply taking out a loan to pay for it. You repay the loan over time, and when your loan terms have been satisfied, you own the car.
Just like with any other loan, you’ll repay your car loan with interest. So when you shop around for a loan, your goal is to get the lowest interest rate, or APR, possible. A lower interest rate means that you pay less interest overall. And when you pay less interest, you can save a bundle on the total cost of buying a new car.
Your Credit Score and Why It Matters
To determine your interest rate, a lender looks at your credit score, which is a reflection of your payment history, along with the details of your loan, such as the loan term and amount you’re financing. Your income is also a factor, because lenders want to make sure you can afford to finance a vehicle.
Your credit score is a reflection of how likely you are to pay back your debts, which is why it matters to lenders. Before you begin shopping around for a loan, you absolutely need to check your credit score. You can also obtain a free copy of your credit report. Check it for any errors or fraudulent activity, and contact one of the three major reporting agencies (Experian, Equifax, or TransUnion) to have any discrepancies fixed. This will improve your credit score before you apply for financing.
Check Out Various Lending Options
You can finance your vehicle through banks, credit unions, automotive lenders, or your dealership’s financing department. To get the best possible interest rate, it’s a good idea to check out a number of different options.
Apply for prequalification from different types of lenders to see which gives you the best APR. By shopping around, you’ll have a better idea of what you can expect. You can use your quotes as leverage to try and get the best possible APR.
Obtain Preapproval and Set Your Budget
Once you have a few lenders in mind, you can have them compete to give you the lowest APR. Get preapproval for the loan you want, and you’ll know exactly how much you can spend at the dealership.