The process of getting auto loans is incredibly simple. So many different people opt for auto loans when they are planning to buy a new car. A lot of people do not think about how many different factors can influence the amount you pay for car loans. There are many things that can change how much you are paying for a car, truck or motorcycle. Auto loans widely vary based on the vehicle you are planning to buy. There are also different types of loans and payment plans available to meet individual requirements. By analyzing types of auto loans, you can know not only what to expect, but what you may need for your own loan.
Auto financing options
You’ve found the perfect car. It fits your image, your lifestyle and now it has to fit your budget. If you’re like 70 percent of Americans, you’ll have to finance the purchase.
Auto financing is a big business, generating $500 billion a year in loans. Many players are competing for a share of that business. Before you buy, find out about your financing options and ensure that you’re the one who comes out ahead.
The dealership is usually the most convenient source of financing.
But convenience comes at a high cost. The interest rate on dealer-financed loans is usually higher than on bank or credit union loans — sometimes substantially so. Dealers set purchasers’ interest rates based on their credit rating and then tack on fees and extra percentage points. This costs car buyers up to $1 billion a year.
That’s how dealers generate revenue. Dealers also make money by selling your loan to other lenders, which pay them part or the entire markup as a commission — creating an incentive for dealers to pile on as much interest as possible.
Studies have shown that interest rate markups can be even higher for members of visible minorities. As a result, class-action suits have been filed across the country and caps are slowly being introduced. Some states have laws that prevent interest charges over 20 percent.
Get pre-approved for a loan.
It’s a good idea to get pre-approved for a car loan by a lender or lenders before going to the dealership. You can use these offers as leverage to try to reduce the dealer’s interest rate. Take the best deal you are offered.
The dealership may offer you a choice between a cash-back rebate from the manufacturer and low-rate financing — typically a loan with zero-percent APR. Statistics from the National Automobile Dealers Association show that of the people who apply for zero-percent financing, only about one-third are approved and a mere 10 percent ink the deal. Even if you can afford the higher monthly payments that usually come with zero-percent dealer financing, it may be a better deal to take the rebate and take out a low-interest loan from the bank, if the rebate is over $1,000.
If you own a home and qualify, you can often get a lower rate by taking out a home equity loan.
With this type of loan, you borrow against the paid-up equity in your home. The interest rate is almost always lower than for other types of consumer loans because your house acts as security. You also may be able to deduct the interest from your income-tax bill. Remember to compare the home equity loan and your other options on an APR basis.
You must be a member of a credit union to obtain a loan from them. They account for approximately 25% of new car loans. Credit unions offer the best loan rates – typically, one half to one percentage point lower interest than bank car loans. Further, credit unions typically charge simple interest, saving you additional money.
Banks are the most common source for financing, accounting for about 40% of new car loans. You may be able to negotiate better terms, such as a lower interest rate, if you have a longstanding relationship with a bank. But you don’t need to have an existing account at a bank to acquire a loan from them, so check with several banks in your area for the best interest rate. Some banks offer a pre-approved loan, which allows you some flexibility in shopping.
A finance company that is owned by an auto manufacturer, such as Ford Motor Credit or General Motors Acceptance Corporation, is called a “captive finance company.” Captive finance companies account for approximately 20% of new car loans. Finance companies buy a loan wholesale, mark it up, and sell it retail. It may be easier to get credit through a finance company than through a bank, but it usually is at the cost of a higher interest rate.
Car Buying Tips
If you’re like many people, you may find the car buying and car loan process confusing and intimidating. Sales people are sometimes aggressive, and they may use car buying and car loan terms you’re not familiar with.
Understand Your Car Loan Options
Auto dealerships often treat a car loan as an afterthought. They’d rather sell you a car first, and then discuss car loan terms later. However, that approach puts you at a disadvantage and it often results in buyers agreeing to finance terms that aren’t right for them. So here are some car buying tips for getting the right car loan for you.
Know Your FICO and Credit Score & Fix Any Issues
The first step in applying for a new or used car loan is to get a copy of your personal credit report. Knowing your FICO and credit score will help you better understand how to get the best car loan possible.
This is one of the most important car buying tips and following it could increase your credit score rating and save you hundreds or even thousands of dollars on your next car loan.
Know Your Budget & Car Loan Payment Limitations
Before you apply for a car loan, it’s essential to know exactly how much you can afford to borrow, and what your monthly payments will be.
Understand the Components of Your Car Loan
The key components of any car loan are:
- Vehicle Price
- Down Payment
- Interest Rate
- Length Of Car Loan (Term)
- Monthly Payment Amount
- Taxes (govt. fee)
- Titles (govt. fee)
- Licensing (govt. fee)
- Document Fee (dealer fee)
- Service Contract or Extended Warranty
- Pre-paid maintenance contract
- Paint and interior protection
- Gap Insurance
Shop Around For A Car Loan
Although car loan companies have tightened lending standards, car financing options are available to most consumers that aren’t limited to loans offered through auto dealers. Today, there are many car loan sites offering a range of new and used car finance solutions.
Online car loan companies offer some of the most competitive APR’s in the market, because their loans are not “marked-up” like dealership car financing. Additionally, to be certain you get the right car loan, you may also want to visit your local bank and research their car finance options or your credit union if you belong to one. The more you shop around, the better your chances of getting the best deal on a car loan.
Choose the right car for you.
When it comes to picking a car, knowledge is power. With so many car research tools and information available online, there’s almost no need to visit a car dealership until you’re ready to take a test drive.
You can compare features, prices, and quality ratings right from your home computer, helping you narrow your search to two or three models before you set foot in a dealership.
Negotiate Your Price & Get Your Car
Now you’ve secured your car loan, done your research, and chosen a car that fits both your budget and your practical needs. It’s time to contact a dealer and begin negotiating price. Many auto dealerships have internet departments that will provide a price quote via e-mail. Start by contacting a local dealer.
You’ll find it’s possible to save hundreds if not thousands of dollars from ever stepping foot into a dealership showroom. Next, go to the dealership, take a test ride, compare car loan terms and drive home in your next new car.