When you’re in the market to purchase a new vehicle and need to secure an auto loan to do so, it’s always best to shop around for the best interest rate, and for the agreement that works best for you.
Often times, consumers will secure a loan to purchase their dream car, but will then fall behind on payments and become delinquent. This tarnishes your credit score and may even result in vehicle repossession, depending on the terms of the loan agreement and how delinquent the account is.
Here are some steps to take prior to securing a loan, and how to ensure you find the best loan agreement for your situation.
Check Your Credit
There are a number of factors that will affect your auto loan agreement, but the most important is your credit history. Before you start shopping for interest rates, check your credit report and credit score. You can get a free credit report from each of the credit reporting bureaus (TransUnion, Experian, and Equifax) every 12 months.
Review all of the information for accuracy. Dispute any credit report errors by writing directly to the reporting agency. Negative listings that are more than seven and a half years old, like prior vehicle repossessions, should no longer appear on your report.
You should also review your credit score. This gives lenders an idea of your creditworthiness and will help determine what kind of interest rates you’ll be eligible for.
Assess Your Finances
Take the time to consider your current financial situation. Create a budget if you don’t already have one. This will help you determine how much you can afford to spend on monthly auto loan payments and will help you avoid signing an agreement that you can’t afford.
Choose a Lender
Once you know your budget, you can begin shopping around for lenders and interest rates. A higher credit score and healthy credit report will make you eligible for loans with lower interest rates. You should also consider whether you want to sign an agreement with a bank or finance company or with a credit union.
Credit unions may be able to offer lower interest rates than banks and finance companies, but they may only lend to members and may have more stringent credit requirements than a bank. See this article from Credit.com for more guidelines on how to choose between a bank and credit union.
Review Documents Carefully Before Signing
Always secure your auto loan agreement in writing, and be sure to review all of the details of the agreement very carefully before signing. This agreement should provide details on what would occur if you ever fall behind on payments.