Not every person has the cash to pay for a car outright. In fact, as of 2013, 84.5 percent of drivers required some sort of financing before they could drive their car off the lot. With this in mind, it’s even more important to know how financing works and the best ways to help secure it. If you’re in the market for a new or used car, check out these handy tips to help you secure car financing.
Check Your Credit Score
Before you march into a bank or other lender, you need to know your credit score and anything that’s affecting it. Many times consumers find that there’s an outstanding balance that needs payment, a bill they didn’t know about, or at the very worst, credit fraud or identity theft. By knowing what’s on your credit report beforehand, there are no surprises.
Pay Off Outstanding Debts
Although it’s impossible to wipe out your mortgage in a single payment, smaller debts such as medical bills, credit cards, and lines of credit are easier to pay off because of the lower balance. However, paying them is important. Not only does it show your credit worthiness and willingness to pay, but it also lowers your debt-income ratio. This ratio is your total monthly debt payments divided by your monthly income. The lower the number is, the more likely you’ll get the loan. The magic number here is 43 percent, so try to get to that level or lower.
Shop Around
Just like any other big purchase, it’s important to shop around, not only with dealers, but lenders as well. What this does is give you an understanding of the typical rates that lenders provide. Usually, these lower rates tend to belong to credit unions, which operate as a non-profit and are able to offer lower interest rates. However, many online brokers and dealers themselves have started to run with lower rates, so it pays to check with them, too.
Don’t Apply Until You’re Ready
Another major pitfall for borrowers is that they apply to any business that offers a low rate, and are completely unaware of how this adversely affects their credit score. Each time you put in a loan request to a lender, they pull your credit, also known as a hard inquiry. One or two hard inquiries aren’t bad, but multiple ones lower your credit score substantially. Therefore, it’s imperative that you narrow the scope and keep this from happening.
Choose the Right Car
Lenders aren’t stupid. If you walk into a bank and want a loan for a Ferrari but only make $50,000 per year, there’s almost no chance it’ll happen. Instead, find a car that fits your budget and needs. By doing this, you won’t pay heaps of interest and your chances of getting approved skyrocket. Typically, you’ll want to find a monthly payment that’s no more than a few days’ worth of pay.
Securing car financing is a difficult and stressful venture if you don’t do your homework beforehand. However, if you follow these tips, you’ll find yourself in the driver’s seat both figuratively and literally.
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