March 28, 2023

Purchasing your first car is a significant life milestone. Unfortunately, many aspiring car owners quickly commit to auto loan financing before assessing the financing implications. Asking the appropriate questions will help you understand important details about your auto loan contract. Below are three essential questions you should ask your auto loan representative before committing to a car purchase. 

1. How does my credit score impact my loan options?

Auto loan representatives consider credit scores when assessing a client’s ability to make repayments or creditworthiness. You can confirm your credit rating from your bank, credit card issuer, or a reliable credit reporting agency. Most auto dealers and lending institutions will share a copy of your credit score before proceeding to the auto loan approval. It’s essential to confirm that your credit score matches the auto dealer’s financing rate. 

Length of credit history, nature of loans applied, total outstanding payments, and late repayment history are common factors lenders consider when assessing creditworthiness. 

A typical credit score rating ranges between 300 and 850. An 850 rating is considered a perfect score and represents excellent creditworthiness. Typically, lenders and auto dealers offer clients better rates and repayment terms to clients with high scores. Most lenders offer favorable terms to clients with a credit score of 750 or higher. Car dealerships charge higher interest rates and may require upfront deposits when dealing with low credit score clients.

2. What is my interest rate?

The interest rate is a crucial financing factor in an auto loan, and it ultimately influences how much you pay for your new car. Seek clarification from the auto dealer about the following aspects of your interest rate.

• Is the rate fixed or compounding? The repayment terms are based solely on the borrowed principal amount with a fixed annual interest rate. The repayable interest rises and accumulates over time in a compound interest arrangement because it’s based on the principal plus accrued interest. 

• If compounded, inquire about the frequency of compounding. An interest rate that compounds daily or weekly may result in higher repayment terms than one that compounds quarterly or yearly. 

• Ask about the nature of interest amortization. Some dealers may solely devote repayments from the initial years to interest repayment, while others amortize the principal plus the interest from the onset.

3. What are my loan’s repayment terms?

After understanding the interest terms, you should seek more clarification about the actual repayment terms. Inquire if there are penalties for missed payments. Some car dealers charge penalties for late or missed payments, a factor that drives up the total repayment amount. 

Prepayment penalties are another vital consideration when assessing the financial implication of a car loan. Prepayment penalties give the lender authority to claim interest regardless of repayment patterns. More importantly, many car dealerships structure repayment terms such that the principal remains outstanding until the client clears the interest repayments. 

Understanding the loan structure allows you to make informed decisions that get the best out of your financing arrangement.