Purchasing a new car with a loan usually takes a little bit of planning and preparation. We’ll walk you through some of the key tasks necessary before you sign on the dotted line.
1. Calculate How Much New Car You Think You Can Afford
The first thing you must consider is how much you want to commit to paying for a new car. Analyze your wants, needs, and budget to make sure the car you choose is truly the best option for you. Consider the size, gas mileage, safety, and luxury features, and overall value of the vehicle, and compare warranty coverage, service, or repair estimates before you apply for a new car loan.
2. Check Your Credit Score
Your credit score will directly impact your financing options because lenders set their interest rates on your risk assessment. Lower scores translate to higher risk, and this results in higher interest rates. Every percentage point is significant over the duration of the loan, and that can translate to a substantial cost increase.
Fortunately, there are proactive steps you can take to get yourself into better credit standing before you make that big-ticket purchase. Credit monitoring services can offer suggestions for cleaning up any negative reporting, and the work you do ahead of time will pay off.
3. Improve Your Credit Score Before You Apply
It’s important to note that when you apply for a new car loan, the potential lender will likely check your credit history, and that inquiry, referred to as a “hard pull” or “hard inquiry,” will be added to your credit report, effectively lowering your score by a small amount. If you did your work from step 2, you know what’s on your credit report, and you can work to improve your score before inquiries can affect your loan terms.
A hard pull will generally remain on your credit report for two years, but a single instance or several instances close together will only have a minor effect. However, multiple hard inquiries over a longer time frame can have a more substantial impact on your ability to acquire a new car loan, as many lenders are inclined to suspect issues with income stability. So opt to only apply with lenders you’re seriously considering, and try to submit all the applications within a 30-day period.
4. Save for a Down Payment
Dealerships may offer a $0 down special and lenders can offer 100% financing, but the better choice financially is to make a down payment. The arithmetic is pretty straightforward: the larger the down payment, the less bank financing is needed. The recent trend has been to put down 10% to 12% of the ticket price. However, a down payment of 20% or higher can attractively lower interest rates. It can also help to mitigate your initial depreciation loss by maintaining equity.
5. Check Your Budget to Make Sure You Can Afford the Monthly Payment
Double-check your budget, and plan for some changes in your financial obligations. For example, new car loans will often require full coverage auto insurance, and this could push your monthly financial comfort levels.
Whenever possible, consider a shorter-term loan. If you can afford the monthly payment for a 48-month auto loan versus a 60-month, opt for the 48-month agreement. The shorter loan will save you money in interest charges over the duration of the loan. But it’s important to be sure the higher monthly payment fits into your budget in a way that makes this purchase a source of happiness rather than a struggle. We offer up to 84-month terms, so if you’re in the Portland area, visit our new car loan options at Rivermark Community Credit Union.
6. Consider Taxes, Fees, Etc.
In some states, such as Oregon, residents aren’t charged a sales tax, but that doesn’t mean there aren’t other charges to plan for. First off, you’ll have to pay for the title and registration fees, as determined by the DMV. Also, the dealership is allowed to charge document fees up to $150 and destination charges that can vary.
This is likely a small responsibility in relation to the larger financial obligation, but it’s important to be aware that additional charges may be added. The more you’re prepared to handle the little things, the more ease and confidence you will exude when you’re deep in the process.
7. Dealership Financing vs. Credit Union Financing
After you have made the big decisions about what make and model you want to purchase, your next important step is deciding how you want to finance. The distinction between dealership financing and credit union or bank financing is often just about who is doing the footwork on your new car loan. If you’re inclined to do it yourself, you could find lower interest rates, favorable terms that fit your budget, and ultimately develop a personal relationship with your lender. With dealership-processed financing, you submit an application, and the financing team will shop their lenders and negotiate interest rates on your behalf.
There are advantages and disadvantages to each, so think about what is best for you. Sometimes, walking in with a pre-approved loan—a “blank check”—takes that sales pressure off and reduces after-market add-ons.
8. Legal Documents
There are a number of documents you must provide in order to purchase your new car. The first of which is proof of Identity. This is a valid government-issued identification card, a state driving license, or a US passport. You must also provide proof of residence, which is often a utility bill addressed to you at your residence. For financing, you will need to supply proof of income, and frequently, lenders will request the last three months of your pay stubs. Finally, you’ll need proof of auto insurance coverage. Your lender will likely have requirements on the type and amount of coverage you will need for your new car loan.
9. Make Your Payments On Time, Every Time
Understand the terms of your financial agreement and read the fine print. Know what the penalties are for late payments and missed payments and whether there’s a grace period. Make your payments on time and contact your lender immediately if there’s a change in your financial situation. Be proactive.
10. Drive It Like You Stole It!
Actually, no. Don’t do that. You work hard so that you can have nice things. Enjoy them to the fullest, and do it with more reward than risk in your ratio. Rivermark Community Credit Union can help get you there.