7 Things to Know before Applying for a Car Loan

You are dreaming of owing your own new car and applying for a car loan. Pause to consider the following to ensure that the process is a smooth one and you can get the best deals available in the market.

1. A KEY POINT IS YOUR CREDIT HISTORY

Any consumer within the United States is entitled to a free credit report. Make sure you check yours to understand the health of your credit score. If you have a bad credit history, then take the necessary steps to repair your credit score since a bad one can adversely impact your auto loan rate.

2. KEEP YOUR DOCUMENTS HANDY

Any bank or financial institution will generally ask for proof of income, for your permanent and residential address, and for copies of your tax return and of your bank statements from the last three months. Ensure that you have them in place to avoid any delays.

3. KNOW YOUR BUDGET

Understand how much you will need to pay on a monthly basis and figure out if this falls within your capability to repay. You don't want to get too ambitious and fall short a few months down the line.

4. KNOW HOW TO AVOID AN "UPSIDE-DOWN" LOAN

While it is tempting to choose a low-cost loan since it involves a low down payment initially, be warned. When you calculate the final repayment amount, you might realize that these loans actually bear more heavily on your pocket and that, in the long run, you end up paying more than the true value of your car.

5. HAVING INSURANCE IN PLACE FACILITATES THE PROCESS

This is not a mandatory prerequisite, but already having your car insurance ready helps you to drive away in your car the day you buy it. If you do not already have insurance, you might need to buy the car, then go to a separate insurance office to insure it, and bring back the insurance card in order to drive away with the car. In most cases, if you are already insured, an insurance agent would not mind faxing the insurance card directly to the dealer while you are waiting, making the process that much faster. 

6. YOU CAN BENEFIT FROM ASKING AROUND

Your car dealer is not your only destination for getting a deal. In fact, more often than not, the best car loans are obtained from other sources, which can include banks, online lenders and credit unions. Being diligent in checking around the market can help you end up with a pretty good deal.

7. PREPAYMENT PENALTIES CAN BE COSTLY BUT AVOIDABLE

Make sure you read the fine print of any loan you are getting into. Some car loans come straddled with a prepayment penalty. This penalty is charged if you pay off your car loan earlier than what was initially scheduled. Ask your lender about this clause and ask them to take this part out of your contract. An extra payment or even an early payoff can save your hundreds of dollars in interest.