Securing any loan can be a daunting task. This can especially be the case when you’re looking to purchase a vehicle. In fact, the average new car in the United States costs nearly $40,000. Plus, increased demand for used cars in recent years has caused prices in that sector of the market to skyrocket.1

Because of the cost of borrowing, you’ll want to take several issues related to auto loans into account.

Know Your Credit Score Bracket

Your credit score will definitely affect the amount you’ll need to pay for a new or used car.

There are three general brackets when it comes to credit scores. Those who have a credit score below 600 fall within the subprime market, while banks consider those who have scored in excess of 660 as prime or super-prime borrowers. Credit reporting agencies classify those who fall between the two extremes as nonprime.

If you fall near the bottom of the credit score scale, you’ll wind up paying a higher interest rate than those who have higher scores. In most instances, interest costs will be much higher for subprime borrowers.

For example, in the last quarter of 2018, those with credit scores of 781 or higher had an average interest rate of 4.19 percent on a new car loan. Additionally, the spread between a new car loan and a used car loan was only 0.5 percent. Those who were at the bottom end of the scale, classified as deep subprime borrowers, had scores between 300 and 500. These people had an average interest rate of more than 14 percent on new car loans and more than 19 percent on used car loans.2

Apply for Loans Within Two Weeks

You’ll want to start applying for loans within two weeks of when you’ll actually go to purchase the car. Interest rates can vary quite a bit within a short period of time.

If rates were to go up in between the time you apply for a loan and the time you actually purchase the car, it’s possible that you’d wind up having to pay the higher rate. If the rates go down, it’s always possible to make another application. The only impact that’s likely to come from making another application is a small short-term drop to your credit score.

Get Pre-Approved Before Shopping

It’s a good idea to have financing in place before you start shopping for a new or used vehicle. One of the biggest benefits that can come with pre-approval is the knowledge of how much car or truck you’ll be able to buy. A lender will tell you how much you can actually borrow.

There are other benefits. If you’re ready to make a deal, a dealership might be more willing to work with you to close a sale. Having approval beforehand will allow you to know what your interest rate is. You might decide to adjust your purchase to minimize the amount you’ll have to pay based upon what the bank or credit union allows you to borrow.

Calculate Total Costs

A new car or a used car that’s new to you will come with several costs. Most people just look at the sticker price and then start to negotiate from there. However, there are additional costs to take into consideration.

Most states charge sales tax. This could add quite a bit to the cost of your car. In some instances, you might have to add as much as eight percent or nine percent to the cost of your car just because of the sales tax.

The additional costs do not stop with the sales tax. There are also title fees, dealer’s fees, and licensing fees that come with purchasing a vehicle. Additionally, your vehicle insurance is likely to go up if you’re moving up with your purchase. Because you’re taking out a loan, the dealer and lender will require you to carry comprehensive insurance coverage. This can cost quite a bit more than simple liability coverage. Most dealers will also recommend a gap coverage policy that will pay any difference between what you owe and what your insurance pays out in the case of a total loss in an accident.

The final expense that you’ll want to take into account is the amount of interest you’ll pay. Some salespeople will try to encourage you to think of the excess cost as being only a few pennies or dollars a day. However, the interest you’ll pay could wind up costing thousands over the course of the loan. As such, you’ll want to keep this in mind when making your purchase.

Consider Dealer Financing

You might think that a bank would offer better interest rates than a car dealer. This might be the case, but if you’ve decided to purchase a new car, it’s likely you can get a better interest rate by financing through the dealer.

Many dealers will offer special interest rates to entice people to come in and by a new car. These deals will usually come around near the end of the year as dealers are trying to move inventory.

Additionally, new car dealers will usually have preferred lenders that they work with to offer these lower rates.3

Online Car Loan Lenders Let You Compare Rates

If you’re ready to buy a car, it’s a good idea to shop around for rates. The advent of the Internet has made this process easier than ever. By searching through online lenders, you’ll have the opportunity to compare rates in real-time. Some will even let you apply while you’re online, so you can know how much you can spend on your next vehicle.

Outside of your home, your vehicle will likely be one of the biggest purchases you’ll make. The interest rate you’ll have to pay can vary greatly based upon the prevailing market rates at the time you decide to buy. It can also vary based upon your credit score. This is why you’ll want to put in the effort to find the best rate possible given your personal circumstances.

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