While buying a used car through a loan, you should always keep your affordability in mind. Knowing your monthly interest payment before you finalize the credit is crucial to your financial soundness.
It’s common for people to get confused by the plethora of auto loan schemes available in the market. If you are on the same page as them, you should keep in the following factors that could affect your monthly payment:
Credit score
This is perhaps the first thing that lenders will look at. It's difficult even to secure a loan with a poor credit score because lenders perceive the dealing to be risky. A poor credit score usually entails a high rate of interest, which may not always be feasible. So make sure your credit history is solid before approaching a lender.
Amount of financing
Your monthly interest payment will also depend on how much money you borrow. A smaller principal amount means you pay less to clear it off over time. Securing 100 percent financing without any down payment is challenging. Hence it is recommended that you pay at least 20 percent as down on the car’s value.
Income
The debt-to-income ratio is a crucial factor that must consider while applying for a used car loan. A lower debt-to-income ratio gives your lender the confidence that you can repay your loan. As such, you stand a high chance of getting a low-interest loan.
Tenure of the loan
The number of months you are taking the loan for is another important factor determining your monthly payment. The tenure for auto loans is generally seven years. Short-term loans involve a high rate of interest, which lowers as the loan tenure increases.
Even if you have a bad credit score, you can improve your creditworthiness by showing substantial cash savings, decreasing your debt-to-income ratio or making a larger upfront payment. All you have to do is make your interest payments on time to avoid a repossession situation. You can check out different auto loan schemes online and compare them to decide which one suits you the best.