What You Need to Know About Car Loans
One of the first things you will likely want to do when you arrive is sort out your transportation. Unless you are lucky enough to live in one of the few cities in the US with robust public transportation, this will likely mean purchasing a car. Unless you plan to buy a car with cash up front, you will need to secure an auto loan to finance a new or used car. This can be an expensive undertaking, so let’s take a closer look at the basics of securing an auto loan.
Auto Financing Terms
There are a number of important terms to be aware of when shopping around for auto financing:
- Interest/finance charge: the cost of the loan. Banks aren’t going to give you money for free. Instead, they’ll attach interest in the form of an annual percentage rate (APR), which will be added to the cost of the loan. The rate you will get will be heavily dependent on your credit score, which of course can be a bit problematic for a recent immigrant with no credit history.
- Car loan term: this is the number of months your loan will be spread out over. Longer terms might lower monthly payments, but as you will pay interest each month you hold the loan, you will often end up paying more money overall.
- Down payment: the amount of money you pay upfront when buying the car.
- Monthly payment: how much you will pay each month for your car. This is calculated by taking the total cost of the car and subtracting the down payment, then adding the interest or finance charge, and finally dividing by the term of the loan.
Auto Loan Pro Tip:
Follow the 20/4/10 rule: aim to make a 20% down payment on a loan with a term of no more than four years, and make sure the monthly payment will be no more than 10% of your take-home pay.
Auto Financing Documentation
To finalize a loan, you will need the following documentation:
- Proof of identity
- Your visa with the length of your stay in the US
- An SSN or ITIN
- Proof of residence, income, employment, and insurance
- Vehicle information including the purchase price, the vehicle identification number (VIN), and the year make, and model
After finalizing your loan, always remember to make your payments on time! It’s best to set up automatic payments. If you miss a payment, it will hurt your credit score. Worse, if you miss several payments, your car can be repossessed - taken back by the dealer.