“How to Finance Your Car: Tips and Insights”

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What Is Financing a Car?

Are you considering purchasing a new car? If you don’t have substantial savings, you’ll likely need to finance your purchase. Car prices have increased by 13.5% over the past year, with the average new car buyer in the U.S. paying $48,528 as of May 2023, according to Cox Automotive. Financing a car involves obtaining a loan from a bank or another lender to cover the vehicle’s cost.

How Do Car Loans Work?

When you buy a car, you typically make a down payment, which is a percentage of the car’s price. The remaining amount is financed through a loan from a bank or financial institution. This loan is repaid in monthly installments over a set period, with the car serving as collateral. If you fail to make payments, the lender can repossess the vehicle.

Key Terms to Understand

Down Payment: The initial amount you pay upfront. A down payment of at least 20% is recommended to secure better loan terms and protect against depreciation.

Annual Percentage Rate (APR): This reflects the total cost of borrowing, including interest and fees. Comparing APRs helps you evaluate different loan offers.

Monthly Payments: These include both principal and interest. Ideally, your car payment should be 10% or less of your take-home pay to avoid financial strain.

Loan Term: The duration over which you repay the loan. While longer terms mean lower monthly payments, they also result in higher interest costs over time.

How to Finance a Car

Auto loans can be obtained from banks, credit unions, online lenders, and auto dealerships. However, getting preapproved for a loan before visiting a dealership often results in better rates. Follow these steps to finance a car:

1. Determine your budget, considering income, expenses, and existing debt.
2. Check your credit report and score several months before applying for loans.
3. Compare loan terms from various lenders online.
4. Get preapproved for a loan to know how much you can borrow and at what interest rate.
5. Visit the dealership, choose your car, and see if the dealer can offer better terms.
6. Finalize the loan and purchase the car, opting for the shortest loan term with affordable payments to save on interest.

What Credit Score Do I Need to Finance a Car?

There is no universal minimum credit score for auto loans, as different lenders have varying criteria. Generally, a higher credit score makes it easier to get approved and secure better loan terms. If you have fair or poor credit, you may face higher interest rates and fewer loan options.

Improving your credit score before applying for a loan can help you qualify for better terms. For instance, a person with a FICO® Score of 500 might pay an average interest rate of 14.08%, while someone with a score of 800 could pay around 5.18%.

The Bottom Line

Improving your credit score before applying for an auto loan can help you secure lower monthly payments and interest rates. Consider using services like Experian Boost® to enhance your credit score by getting credit for timely payments on utilities and streaming services. With a better credit score, you could be driving your dream car sooner than you think.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you with all your financing needs!

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