Are you thinking about buying a new car? If so, perhaps you are also thinking about the car loan process and wondering what to expect. Well for starters, buying a new vehicle does not to be a particularly stressful experience. Although in order to decrease your anxiety about it, you should go into this process by learning more about car loan terms as well as what to watch out for when signing a car loan contract.
Have bad credit?
Here are some areas of the car loan process that you will want to take in account before you move forward with your loan.
First of all, if you have bad credit and are looking to obtain a car loan, it is still possible. Be aware, however that you may expect to have a higher interest rate as it is common for lenders to offer individuals with bad credit higher rates, compared to borrowers with stronger credit. Therefore, it is ideal to prepare for this outcome from the very beginning.
What can you afford?
With bad credit, you will also want to make sure that you are entering into a car loan agreement for a vehicle you can actually afford. For example, if you take a look at how much it will cost, including what will be the realistic amount you can afford to make on car loan payments each month, as well as the total cost of that vehicle.
Can you afford to pay $300, $500, more? Being aware of your monthly car loan budget for each month moving forward will make this a more success process for you over time. After all, if you can not make these payments, and you miss or make them late – this will only serve to derail your credit score and negatively reflect in your credit history even more so.
What type of interest rate is best?
Also before signing a car loan contract, you would be ware of the different types of interest rates.
A Fixed Rate Car Loan for example, means your interest rate will remain the same for the entire duration of your car loan term. If your car loan is for 5 years, then the interest rate you are given at the beginning of the term will remain the same until the end of the term or whenever you refinance your loan and terms.
With a fixed interest rate, you will know exactly how much interest you will be required to pay each month on your loan as the rate and the principle monthly payment amount will remain unchanged. There may also be some instances where you can switch to a variable rate down the line as well, although in many causes having a fixed rate can also provide its own advantages over time.
A Variable Rate Car Loan, on the other hand means that your interest rate will typically fluctuate based on the rise and fall of the prime rate. This means that even when you enter into a car loan contract with a certain interest rate, this rate could be subject to change at any time.
This can be both a good and a bad thing, depending on the current prime rate. For example, if you have a relatively low rate when your car loan term begins, this rate may increase in the event the prime bank rate rises. However, as you can probably imagine when the rate decreases, your car loan rate will also go down.
If you have bad credit, and you want to take advantage of the current low interest rate, this can be a good thing for you and your ongoing monthly car payments. However, the downside of course being, if the rates goes up so does yours and you can then expect to be paying more.
Another overall positive take on this can be that with bad credit, it might be nice to sometimes be afforded the opportunity to pay slightly less in interest, especially when you already are prepared to take a higher rate from the start.
What length of term is best?
While car loan terms can range in duration, some can be as high as 84 months or 7 years. While a longer car loan term may mean you are paying less amount each month versus a term of nearly half that – it can also mean you are paying a lot more interest over time. In fact interest rates may be higher on longer loans, so this is also something you will want to watch out for. A longer car loan term does actually in many cases prolong the debt – even increasing it, as interest charges only continue to add up.
For individuals with bad credit, it may actually be best to look at car loan terms that range from 30 to 60 months instead. This method will also allow you to focus on purchasing a vehicle that is more affordable for you. With longer terms, we may think we can buy a more expensive car because we are paying over an extended period of time – however again this can lead to more debt down the line.
Therefore, by choosing a more affordable vehicle from the beginning, you can also look to carry a shorter car loan term while still being able to keep on top of the payments. By paying the vehicle off even sooner – this can also free up your finances a lot earlier on as well.
Oh and what about a down payment?
You might also look at making a decent down payment as well, and in the process also lowering the total mount of your loan over time. Planning ahead and saving for this payment can also make your overall car loan process run a lot more smoothly too.
In the end, with bad credit you do need to be more conscious of the car loan terms you will be given. However, by watching out for these important car loan details – before you sign on the dotted line – you can avoid more hassle and more expense down the road.