When the time comes to buy a car, one of the most important steps in the process, and one that can make or break how you feel about the experience, is getting an auto loan. One of the difficulties that some buyers face is that they are surprised when they see what kind of financing they are offered.
Here, we’re going to take a look at the factors that affect your auto loan:
When you apply for a loan, lenders run a credit report, and the credit score summarizes certain factors within the report, including your current and closed credit accounts, history of payments and how long you have been actively using credit.
Ratio of debt to income
The debt-to-income ratio is simply a way to observe the amount of money you owe other lenders in comparison with the amount of money you earn in a given time period. The ratio is used to help the lender determine your ability to pay off the loan you are applying for in a timely fashion. For example, if you have high debt, even a high income may not be enough to make you an attractive loan prospect, if all of your income is already going to debt service.
Size of loan and down payment
If you want to borrow a million dollars, well, that’s a big deal. However, if you are borrowing enough to pay for a medium-sized sedan, and plan to put down a hefty down payment, that’s a much less risky situation for the lender. Put simply, the lower the loan and the larger the down payment you can afford, the more likely that you will be offered favorable terms.
Age of the vehicle
This one might seem confusing at first. NEW cars actually tend to be involved in lower-rate offers, for a simple reason: if you default, and the lender repossesses the vehicle, it will still have a high resale value, allowing them to more effectively recoup losses.
Length (or term) of the loan
By now, you’ll see that lenders look for factors that make loaning to you “a good bet.” The term of the loan is no exception. With a loan that is to be paid off quickly, the terms may be more favorable even if the payments are higher.
Once you are armed with knowledge and know what kind of vehicle you’re in the market for, it’s time to start shopping and get on the road.Written by: Sonny Bynum