Buying a car is a huge investment; in fact, it will probably be the second most expensive purchase within your lifetime, the first being a house. Buying a car through loan financing is even more crucial as the payment period can range up to 10 years, so a single wrong move could have an everlasting impact on your bank balance. This is why it is important to secure a loan that is pragmatically payable and has favourable lending terms. Here are six tips to make sure you get the best deal on a car loan.

1.     Improve Your Credit Score

Perhaps the most obvious suggestion is to improve your credit score. Most financial institutions will primarily use this score to assess the borrower’s credit worthiness before anything else. In fact, most lenders wouldn’t even consider the loan application for an Equifax credit score of 960 or lower.

However, it’s easier said than done. Credit scores take many variables into account, including your current outstanding debts, past repayment history and even your shopping history. Repay any owed amounts, starting with the biggest first as they tend to have the most impact on your credit rating. Another less conventional method is to do more credit based shopping and repay the debts on time.

2.     Check Your Credit Report

If you don’t have any outstanding debts and feel that the credit score isn’t accurately assessing your credibility, it might be worth taking a look at the credit report. Though most reputed credit agencies such as Equifax generate automated reports based on your transaction history, the report isn’t entirely immune to error as special cases such as stolen credit cards or disputed payments may be recorded incompletely.

A good way to tally your credit score is to use an online credit checker. These credit calculators project the estimated credit score you should have based on your income and other variables. If the scores projected by the calculator differ significantly from your current score, it might be time to take another look at the report.

3.     Don’t Give Into the Wow Factor

A crafty tactic that many savvy car salesmen use is to show prospective owners a shiny new car and let them fall in love with it before discussing any loan terms. This entices even the most financially sensible individuals to sign a deal on unfavourable terms such a high APR or long term period. In fact, dealerships can make a significant 1.8% mark-up on each loan that they process.

According to the Centre for Responsible Lending, a whopping 80% car buyers finance their purchases through the dealership. Most financial experts recommend shopping for both the car and loan separately, starting with the loan. This makes sure that you are aware of your financing limitations and don’t shop for something that you can’t afford. If you qualify, the lender will provide you with a blank cheque that is valid for a certain amount.

4.     Examine the Fine Print

So, let’s say you finally decided on your dream car, signed all the paperwork and drove it out of the dealership assuming the deal is done. A few weeks later, the dealership calls and informs you that the financing wasn’t approved due to certain eligibility requirements not being met. That shiny new car has to go back to the dealership or you will have to negotiate a new agreement on a higher APR. If you choose the former, your deposit and trade-in might also be kept by the dealership.

Think this is unfair? Well, you signed it. In all the excitement of a new car, you might have skimped out on the details of the fine print, which state that the deal isn’t final until the money is processed and available for them to withdraw. According to the Centre for Responsible Lending in North Carolina, this is known as a yo-yo scam and has become quite common in recent years. Make sure you are aware of the terms of the agreement before signing the dotted line.

5.     Look Beyond the Monthly Payment

Many lenders would offer an incredibly low monthly payment plan that seems too good to be true. Well, it probably is. The amount you will be paying is determined by the value of your new car, the value of the trade-in and the interest premiums. However, all of them should be kept separate, as you might be paying a higher monthly premium if, say, your old car is worth more than you think.

Secondly, a low monthly payment is usually followed by a longer term period, which is a recipe for disaster. Each monthly payment is composed of two components; the premium and the principle value deduction from the total amount. The longer the term period, the more payments you’ll be making and the greater the premium you’ll be paying. On the flipside, a shorter term period would require fewer payments to be made, hence a greater contribution is made to the principle amount.

6.     Be Picky

Since you’ll be bound by the loan agreement for the next decade or two, you have the right to be picky when it comes to lenders. The lending criterion for banks has become much more stringent after the global financial crisis of 2008, but that doesn’t mean that they are the only avenue for a loan. While banks used to be the primary lending institutions a few years back, today many online lending websites have sprouted up that allow you to compare several loans side by side, allowing you to choose the best one.

Getting a loan from an online lending website has several advantages. The first one is that there’s no middleman involved in the process, hence no commission costs. Since online lenders feature loans from multiple private lenders throughout the globe, the rates are also much more competitive as lenders look to make their products more competitive. Finally, online lenders usually take a lesser amount of time as compared to banks due to their non-reliance on paper forms.

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