As with most significant purchases, car loans can be a blessing and a curse. That’s why it’s crucial to understand precisely what you’re getting into before signing on the dotted line. Once that loan gets set in stone, it can be challenging to get out of if your circumstances change (like losing your job). So if you are considering financing your next vehicle purchase, here are some important considerations to keep in mind when shopping around for an auto loan.
When you take out a car loan, your current and future credit scores can be affected. Depending on how you manage payments on your auto loan, you may end up with lower credit scores because of missed or late payments or even get sent to collections. Here’s what you need to know before taking out a car loan.
Installment loans are common forms of financing. According to Lantern Credit by SoFi, “They have to be repaid in fixed monthly payments over a set period, typically three to five years.”
Before purchasing a car, it’s wise to take a few steps to understand your average auto loan rate. First, start by getting pre-approved for an auto loan and figuring out your monthly payment. Then, figure out how much you can afford to pay each month without going into debt or spending more than 30% of your income on transportation costs. If possible, try to put down at least 20% of the purchase price in cash—the less money you borrow from a lender, the better off you’ll be if something goes wrong with your vehicle or if interest rates rise significantly after you purchase it.
Mechanical Repair Coverage
If you’re financing a car, it may be beneficial to purchase additional mechanical repair coverage (MRC). MRC is an optional product offered by auto dealerships that cover certain types of repairs to your vehicle. You can usually choose how much coverage you want.
Discounted GAP Coverage
If you find yourself upside down on your car loan—meaning, owing more than your car is worth—you could face a dilemma if you total your ride. GAP coverage (short for guaranteed auto protection) comes in. It covers any deficit between what you owe on your loan and what an insurance company pays out to cover damages to your car.
Credit Life Insurance
If you’re financing a car, your lender may require that you carry credit life insurance. This policy ensures your loan balance if you die and have not paid off your car. Depending on where you live, it may be cheap or expensive—but either way, it’s typically not necessary: Your heirs will inherit your loan balance if you pass away.
Credit Disability Insurance
An important part of any car-loan agreement is credit disability insurance. Disability insurance will cover a portion of your car payments if you become disabled and can no longer work. This can be worth its weight in gold to someone who’s unable to work but isn’t yet ready to give up their independence by living with family members or moving into an assisted living center.
Suppose you’re looking to buy a car with financing. There are many factors to consider. First, learn about your options and how they can affect your financial situation.