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New Car Financing Guide

9/10/2019

You found it. Your dream car. Now you just have to figure out how to pay for it.
 
Or maybe you’re still shopping, trying to find a new vehicle that will last you a good, long while.
 
Either way, you’ll need to get it financed, and that means applying for a new auto loan. On top of finding the right vehicle for your needs, securing financing can be a challenge in its own right. 

This guide is designed to help you navigate that process so you can make your purchase with confidence.

Choosing A New Auto Loan Over Used

When you go with a new car, you’re committing to a higher upfront cost, and that means the loan you borrow will be significantly larger than what you’d need for a used car.
 
That said, there are definite advantages to going with a new car.

For instance, new cars depreciate at a much more predictable rate than used, so while you will see a sudden drop in value when you drive it off the lot, it still represents less risk to the lender than a used car would.
 
That lower risk means you’ll be able to get lower rates.
 
On top of that, you also save yourself potential expenses from breakdowns and past issues. Every part of the vehicle is brand new, which means there’s much less risk that you’ll pour extra income into sudden repairs.

Preparing To Apply For New Car Financing

Whether you already have a car in mind or are currently shopping, you’ll need to prepare by getting some information together. 

Necessary information includes: 

  • Income information, such as monthly earnings, W-2s, etc.
  • Your credit information
  • Your current debts and living expenses

 The point here is to get a clear idea of how much car you can afford. If you have high expenses and low income, you won’t be able to afford as much.
 
In addition, a poor credit score can make it difficult to be approved for a new auto loan. As such, if your credit score is below 600, you may want to take some time repairing your credit prior to going car shopping.
 
A few ways to improve your credit include:

  • Reviewing your credit report and disputing errors
  • Be timely with bill payments
  • Pay off credit cards
  • Avoid closing credit accounts
  • Avoid opening too many new accounts

If your credit is right on the cusp of being considered “excellent,” or just below 725, you might still want to take some time to improve it. Pushing it up just a little more can help you get better rates.

Choosing A Lender For Your New Auto Loan

Once your finances are robust enough to take on a new auto loan, it’s time to start choosing who to borrow from. You have a few options, and we’ll discuss a couple of those here.

Credit Unions
While a credit union does require you to be a member (which in turn means meeting certain qualifications), it is probably one of the better options out there when seeking new car financing.

Since they’re operated as nonprofits, credit unions tend to offer lower rates and better individual service for their financial products.

Banks
Banks, on the other hand, operate as for-profit entities, and as such, have higher rates. 

However, larger banks are more widespread than credit unions, and if you already have an account with a banking institution, it may be tempting to stick with their services. 

Comparing New Auto Loan Options

Once you choose a lending institution, you’ll want to see what you qualify for. Getting preapproved for a new auto loan will help you throughout the buying process since it gives you a definite figure about how much you’ll be able to afford.
 
The terms of a new auto loan will vary depending on your credit score, income, etc. Among the moving parts of these loans are the following items:

Life of the loan
The life of the loan—or its term—is how long the repayment period lasts. New auto loans can be as short as 24 months to as long as 84 months.
 
The longer the loan term, the smaller your monthly payments. That’s because the total loan amount is spread out over a longer period of time. However, you’ll also give interest more time to accrue.
 
Alternatively, a shorter loan term means higher monthly payments, but less total interest overall.

Interest rate
The interest rate is the annual percentage added to your loan’s principal. The better your credit, the lower the interest rate. 

New auto loans also tend to have lower rates than used car loans.

Monthly payments
The term of your loan and the interest rate determine your monthly payments. 

The shorter the term and the higher the rate, the higher your monthly payments. On the other hand, the longer the term and the lower the rate, the smaller they’ll be.

Additional items
Some lenders give additional incentives on their loans, such as the option to skip the occasional car payment or have no prepayment penalties. 

Finding a lender who offers the best terms can help you land new car financing that works for you.

New Auto Loan Application Process

When you’ve chosen a lender and found a vehicle you love, it’s time to start applying. 

To do that, you’ll need:

  • A photo ID
  • Proof of income, via bank statements and pay stubs
  • Proof of insurance
  • Your address and proof of residence

Having some money saved up for a down payment will also help.
 
To start the process, talk to your lender. They’ll walk you through the application process for obtaining a new auto loan.

Learn more about auto financing



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