Financing is a central part of most car purchases, and the terms of the loan can have a strong bearing on how you feel about the overall buying experience.
Understanding the factors involved will enable you to plan for your application and confidently consider any offers you receive. Here are five important points to know about.
1. Credit score
Your credit score is based on the credit history contained in your credit reports, and sums up how creditworthy you are. It’s a key reference for lenders in determining how much money they may be willing to lend and what conditions it should come with, such as rate of interest.
2. Debt-to-income ratio
Lenders can also assess your ability to take on new debt through your debt-to-income ratio (DTI). This is a measure of your overall debt compared to income over a given period. A borrower with a high DTI, even with a high income, might get a lower loan amount and less attractive terms than they would otherwise receive.
3. Size of down payment
Money down can have a clear effect on your auto loan. It can be used to reduce your loan amount, which equals less risk for the lender. It also suggests you’re less likely to stop making payments and risk losing the car, along with the money you put into it up front. In many cases, the larger the down payment and the lower the loan amount, the more favorable the offer will be.
4. Length of loan
The amount financed will be divided up into monthly installments to be paid back over a number of years. The length of that period, along with APR, will dictate the size of your car payment. You can get a good feeling for how this works – and what may work for you – by using a loan calculator. For example, a buyer with a $20,000 loan amount, 60-month term and 6 percent APR would end up with a monthly payment of $387. If they were to increase the term to 72 months, the payment drops to $331, although total interest charges will increase. Car loans generally range from three to seven years, with six years being the average, and lengthier loans typically come with higher APRs.
5. Age of vehicle
It may seem confusing at first, but new cars are associated with lower-rate loans than used cars. The reason, again, is based on lending risk. In the event of repossession, a new car has a higher resale value, enabling the lender to recoup more of its losses.
Get financing that meets your needs
Besides the main points we’ve covered, choice of lender will also affect a buyer’s auto loan and their purchase process as a whole. That’s why thousands of people get their financing with RoadLoans. We’re the direct-lending unit of national auto lender Santander Consumer USA, and have years of experience helping customers across the credit spectrum into a new or used car.
Our short online application takes just a few minutes to complete, and we provide instant decisions. If approved, simply print your loan packet, visit your local dealer and shop for a vehicle already knowing the terms of your loan. With preapproval from RoadLoans, you can close the deal like a cash buyer.
Apply for a car loan online.