he length of the car loan, or loan term, simply refers to the amount of time you have to pay the lender back. If you sign up for a five-year term, in five years you'll pay the money back and will own the car free and clear. The vast majority of auto loans are repaid in monthly installments. You send the lender a set amount each month and slowly pay off the loan.
When it comes to how much interest is charged on a car loan, some people get charged more interest, and some get charged less. Obviously, you want to get charged less. The interest rate lenders charge is based largely on your credit score, which is a number that credit bureaus assign to you based on how much debt you have, how good you've been about paying bills on time, how long you’ve been using credit and your debt to income ratio, which is the amount of debt you have versus how much money you earn. Lenders use the score to assess how likely you are to pay them back. If your score is low, lenders will assume that you’re at high risk for not paying the loan back. The higher interest rate is the lender requiring more money to cover that risk. Lenders may also require a larger down payment from buyers with lower credit scores to offset their risk as well.
You should know what your credit score is before you apply for a car loan and do your best to make sure it's as high as it can be. Generally speaking, credit scores of 720 and above get the best loan rates. For a small fee, you can get your credit score through FICO, which is the most commonly used credit score among lenders. You can also get credit scores from credit bureaus like Equifax, Experian and TransUnion. If your score is not as high as you'd like, paying off old bills (like credit card debt) and paying all bills on time for six to nine months should bring your score up and help you get a better interest rate.
You’ll also want to take a look at your credit report to make sure everything is accurate. If someone stole your identity and opened a credit card in your name and you aren’t aware of it, this could affect your ability to get a car loan. Plus, you’ll want to report the fraudulent activity right away to the credit bureaus so any errors can be fixed before you apply for auto financing.
You wouldn't just apply to one job or one college, so you shouldn't apply to just one lender for a car loan. Contact your bank, local credit unions and other lenders to find out what they're offering. You'll have to fill out loan applications, which will ask for your social security number, employment and income information, monthly expenses, like mortgage and rent, and any outstanding debts, like credit cards and student loans. When you fill out auto loan applications through multiple lenders, be sure to do it all at once, or within a close time frame. Credit bureaus will see your multiple applications and realize you’re shopping for auto financing. If you spread your applications out, keep in mind that multiple applications for financing can lower your credit score. Do all your applications around the same time, so as not to lower your score.
Do not exaggerate your income or misstate your expenses and amount of debt. Everything you fill out on a loan application will be verified and if you lie, you’ll get caught. The lender will pull your credit history and credit score and decide whether or not to make you a loan offer based on that information, as well as your income, expenses and debts.
Look over all the loan offers you get in detail. The interest rate you’re being charged shouldn’t be the only thing you look at. Avoid offers that charge you a lot of fees. Another thing to look at is the car loan term. A longer auto loan might result in a lower monthly payment, but over the long haul, you’ll pay more in interest. Also, watch out for loans that have a prepayment penalty, which is a fee charged if you pay the loan off early. Paying the loan off early may not be something you'll be able to do, but if your long-lost Aunt Mabel dies and leaves you a fortune, paying it off could save you a lot of money, and you don't want to pay extra fees to do it.
