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Car Loans 101
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Car Loans 101
 
Qualifying for a used car loan and the financing terms you may receive from a bank can take into account several factors. Cars, new or used, can cost lots of money. Any bank that is going to loan you money wants to make sure that they make a good decision on who to loan money to. They want to make sure you the borrower not only has the intention to pay them back, but also has the means, the capability, to pay them back. It is only natural they they are going to want to know a lot of information and history about you. And if you the particular bank you apply for a loan through has a previous good experience or history with you then they will likely offer you a slightly better rate than a bank that has no established history with you. If they fail to make an accurate determination of your ability and intention to repay the loan, if they loan money to someone who doesn’t pay them back, then they can lose a lot of money. It’s a big financial decision for them. Although that is true, the bank isn’t the only one that has to make sure they make a good decision. You do to!
 
Buying a car is one of the biggest financial decisions you will make in your lifetime. The better informed you are the more you are able to make smart decisions about your financial future. You have to think, and really plan it out, and make a budget, so you can make sure you can actually afford to pay back the money you are borrowing, no matter what the future holds. Whether or not you lose your job, you still owe the money, you still have made a promise to the bank that you will pay them back. The more informed you are, the better decision you will be able to make. How much car can you afford. How much will it cost in total every month for the car note payment, the car insurance, the gas, and the maintenance. Just so you know, we think you should set aside an additional $50 per vehicle and automatically have it moved monthly into a separate savings account to cover future auto expenses such as a new set of tires and brake repairs. This is in addition to regular monthly expenses of insurance, gas, oil changes, and the car note itself.  
 
Credit Score
Your credit score is one of the bigger considerations most lenders use to determine the amount of financial risk you represent. Especially if they have no previous loan history with you. Your credit score is like an independent testimony of how well you pay your bills and take care of your obligations. It is used in all kinds of situations, much more than just car loans. Credit scores are used when you get car insurance, apply to rent an apartment, buy furniture, and even as a background indicator with some jobs. When it comes to approving you for a loan, banks do not want to lend money to someone who has shown a history of not paying the money back. And, if you have a history that shows you have not been always on time with your payments, that you have some past due balances, and even repossessions, then your credit score will be much lower. If a bank does decide to lend you money then they are doing so at a higher risk, so they are going to want a higher reward, or return. Hence, you are going to have to pay a higher interest rate until you are able to raise your credit score again. You can think of it has a way of buying back your good credit. A poor credit score isn’t necessarily a “No” from our lenders at Max Auto Sales, but it is true that the better your credit score on your credit report, the better the interest rate you are going to get. It is true that the more recent items on your credit score do tend to be counted more, or weighted heavier in your score, than older items. So, even if you have had issues on your credit report that have brought your credit down, and you are able to get a lender or bank to loan you the money to buy a car, you will have the opportunity to improve your credit score. By paying your more recent auto loan back on time, every time, or even early, you will be reported by that bank as being a good payer. By the time you have finished paying for your new car your credit score will have gone up, assuming of course you haven’t done something else more recently to bring it down again. When it’s all over with, you’ll have paid for a new  or new-to-you car, and raised your credit score. This of course means that your next auto loan will be easier to get, and you’ll more than likely get a better interest rate than you have before!
 
If you don’t know your credit score you can usually get a free credit score or credit report from one of the three credit reporting agencies: Equifax | Experian | TransUnion. At at Max Auto Sales, our lenders report to credit bureaus so paying your car loan with us in a timely manner will actually improve your credit score!
 
Debt to Income Ratio
Your debt-to-income ratio gives lenders an idea of whether or not you will feasibly be able to pay off your loan in a timely fashion, if at all. If you have way more debt in a year than you can typically cover with your income, then adding another car loan, or any loan, is a bad idea. Adding another loan to your debt makes it an even bigger risk, it becomes an even bigger probability that you will not be able to pay the notes every month for all of the obligations you have made. Max Auto Sales will help you do a budget worksheet to help both us and you understand how much of your regular income goes to existing debt and if you can afford to carry more debt, such as car loan.
 
Size of Down Payment
Bigger down payments are better all the way around. The larger of a down payment you can make, the more favorable the terms you will be offered. So if you can afford it, you are better off putting down a larger down payment than a smaller one. It shows the lenders you are serious because you are also putting a lot of your own money into the deal. Bigger down payments shows the bank you are willing to invest more of your own money, and it has been shown that people who do that are a good credit risk because it is less likely they will default on the loan and risk losing the asset, in this case the car, that they have so much money invested in. Bigger down payments shows commitment, and will help you get a lower interest rate because it is less money the lender is having to put at risk.
 
Age and Quality of the Vehicle
The age and the quality of the vehicle affects the terms of loans as well. A better car will last longer. Lenders want to know that the car they are making a loan against will at least last as long as the repayment terms. At Max Auto Sales, we put our vehicles through a pre delivery inspection to do our best to make sure the car you are buying is in great condition. It’s no secret: we want our cars to last you as long as possible because it makes you a happier customer. And if a car has a major break down while the owner is still paying for it then it becomes very hard to pay for both a car note and a major repair. The chance of the loan being defaulted on is higher. While no one can predict the future, and not everyone maintains their car as well as they should once they buy it to prevent major breakdowns, generally speaking a used car that is in better shape when it is sold will maintain that good condition longer. Here is why this matters: In the event of a default, the lender can repossess the vehicle and have a higher chance of being able to offset losses from a payment default with a newer, higher quality vehicle.
 
Length of Loan
The length of a car loan can be a double edged sword in terms of risk for the lender. The length of the loan indicates to lenders how long they have to carry the risk they made when loaning the money. For banks, the shorter the length of the loan means the less return they will be making on their loan to you, not only over time but also because shorter loan periods usually have a lower interest rate, or rate of return. However, a shorter loan term also means the less risk they will be taking over time because they get paid back faster. For your the borrower a shorter loan term means paying less total in interest back to the bank, but it also means a higher monthly payment amount in order to get that loan paid off faster. If you can afford it, a short term loan is a great way to go. On the other hand, a longer loan means the bank has to carry the risk of loaning the money out for longer, increasing ever slightly the risk that the loan may not be paid back. For this, they are going to charge a slightly higher interest rate. So, although they are accepting more risk, they are also reaping more reward if the loan is paid back in full. For you the borrower a longer car loan term means a smaller monthly car note, and that means you may be more easily able to afford the payments in tough times even though the interest rate is slightly higher. Lenders have to figure out a good balance to get the loan paid off quickly, and still give the buyer more favorable terms so that they the bank will be competitive with other lenders, especially if you have good credit because the banks will be competing with each other to make you a car loan. As we discussed earlier one of the tools they use to determine that is your credit score and debt to income ratio. It will be in your favor if you can afford a larger monthly payment with a shorter term (length of the loan), and of course a large down payment can help offset that.

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