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Getting a Car Loan: A Beginner’s Guide to Car Loans
December 7, 2020●
5 minute read●
The thought of getting a new car is exciting. Whether it’s your first time rolling in on a new set of wheels or you’re about to upgrade to accommodate a growing family. But you know what’s probably not excited in all these? Yes, you guessed right, your bank account. A new car can be really expensive, and unless you’ve had car savings for years or you’re related to Jeff Bezos, it can make a huge drain on your bank savings.
The good news is that they’re options available to make this easier. One of these is by taking a car loan. But what does this entail? And how exactly should you go about it? Are there any major risks or disadvantages? Find out as you read.
What is a car loan?
A car loan is a secured personal loan that offers you a loan sum to pay up for a new or used car over a period of time. In this case, the car acts as collateral for the loan which gives you a chance at getting lower interest rates. This also means that the car can be seized if you fail to meet up with monthly loan repayments. The loan is to be used solely to pay for the car. You can’t possibly use a car loan to finance your business or house.
Why use car loans?
You’re probably wondering why you should opt for a car loan amidst the other options available to finance your car. A car loan offers more benefits and is generally cheaper than the credit car option It offers fixed monthly rates that makes budgeting easier for you. It also comes with better interest rates and takes you on a path to full car ownership at the end of the loan term.
How does a car loan work?
It’s important to do proper research before settling with a lender. Lenders are also looking for ways to profit maximally and they all have different terms and conditions. Compare rates and fees before picking a car loan plan that works for you. Set your loan term with your lender. This can vary from one to seven years. Know that a long loan term will mean reduced monthly repayments but also more interest paid overtime.
Where to get a car loan?
Car loans can be sought from banks, credit unions, building societies, peer-to-peer lenders and other finance companies. Some car manufacturing companies also have finance arms you can contact for a car loan. These lenders all have different terms and conditions. Be sure to go through them carefully before settling on one that works for you.
Car dealers also offer what is known as dealer finance. They can offer deals and terms to help you pay off monthly. However, they might bump the price of the car in other to offer what seems like an attractive deal. Be sure to negotiate the price of a car with the dealer before asking for loan support.
How to apply for car loans?
The process is like that of any other loan. You’ll have to provide important personal and financial details to your lender. These details include your income, assets and existing debts or loans. These information helps the lender to see if you’re able to make the monthly repayments for that car. You should also provide details about the type of car you’re buying, so the lender can factor in the loan amount.
You should check your credit score before making an application. A higher credit rating means that you’re able to negotiate better rates and deals. However, you might have to accept whatever interest rate you get if your credit score isn’t that good.
How long does it take to be approved?
The time taken for approval might depend on the type of car you’re buying and how much you’re borrowing. Lenders need to make sure you’re reliable, and so will ask you to provide guarantors that can verify the information you’re giving. These guarantors might be your employer, past lender, accountant, property manager. Your lender will make a call to these people to back up your information. An average car or amount shouldn’t take more than 48 hours, provided the lender gets the important information on time.
What is loan pre-approval?
Sometimes it’s preferable to see if you’re eligible for a loan before car hunting. This helps you not to get your hopes up, in case your loan application is rejected. It’s also good to know the amount you’re able to borrow before looking for a car. This helps to put things in perspective. Loan pre-approval means getting a loan approved before buying a car. The loan will be approved but not released till you’re ready to buy the car. Pre-approval is only valid for a period of time. Generally between 1-3 months.
Tips for getting a car loan with low-interest rate
Have a good credit history
The importance of having a good credit history cannot be overemphasized. It gives you grounds to negotiate better deals since lenders can trust you better. This is not saying that you can’t get a loan with bad credit. It’s just a little more difficult.
Have a guarantor
Trust is the main basis for getting a good loan. If you’re able to provide a guarantor, you might be able to get a good deal off your lender, even with bad credit.
Compare rates and do market research
Don’t just take out loans from the first lender you see. Compare rates from different lenders and research the market properly to swing the best deal.
After you decide to get a car loan, it’s important to ask some vital questions before settling for a lender. Answers to these questions will help you pick the best choice for you. Here are some of the questions you can ask prospective lenders;
- What rates do you offer?
- Is the rate fixed or variable?
- Can I qualify for a lower rate?
- Any additional fees or charges?
- Can I get a loan pre-approval?
- Are there penalties for an early exit?
Getting a car loan is an important decision. Do all your homework to be sure you’re getting the best deal.
Written by Jacaranda Team