Since most individuals need cars for their day to day activities, and they may not have the money to purchase the vehicle, lenders may take advantage of the consumers. It’s, therefore, essential to gather sufficient information before applying for an auto loan. As you shop for a car, there’re several pointers you look at, the same should be the case when shopping for a car loan. Let’s consider fundamental factors to consider when applying for a car loan.
Debt to Income Ratio (DTI)
The debt to income ratio is arrived by summing up all your monthly expense and dividing by your monthly pre-tax income. Most lenders will use this value to determine your loan limit. A majority of lenders prefer to issue loans to an individual who’s potential to pay the car its more than 15-20% of their income. You can calculate your DTI to know the amount of loan you can secure to finance your project.
You also need to consider the term of your loan. Today it is easier to get a long-term auto car loan than ever before. If you opt for a used car, you should be careful not to choose a longer loan term that may outlives your vehicle.
Additionally, although you will be paying lower monthly installments for a longer loan term, you pay more in interest in the long run. When choosing a car loan, you need to compare interest rates from different lenders before making your choice.
Your Credit Score
Your credit score is a critical determinant of your car loan. Most lenders will first check your car loan before approving your loan. They’ll actually fix the rates after assessing your credit score. Thus if there is a way you can improve your credit score before applying for a car loan, please do so. You can wait a few months to let your credit score improve
If you have an issue with your credit score, the dealer may want you to make a down payment before accessing financing. This can be in the form of equity or cash. If you lack any of these, most lenders may not be comfortable to work with you. Thus when scouting for an auto loan, it is also essential to consider a down payment. If you pay a substantial amount of down payment, they monthly repayment aunts will be low beside you will also have reduced the amount of interest you’ll pay for the loan.