Today, cars are more than just a way to get around. For
teenagers, cars represent freedom and independence. For young professionals,
they mean possibility and opportunity. For families, they mean safety and peace
of mind.
Regardless of where you are in life's journey, buying a car
is a big decision. And, just like there are many makes and models of cars,
there are also many vehicle payment options. We break each down, so you can
select the best option.
When shopping for a car, there are two ways that you can buy
it: pay cash upfront or finance a car with an auto loan and pay it off over
time. Both of these car payment options have pros and cons, so you will need to
carefully consider your financial goals.
Paying in cash has a few key benefits: you avoid the car
loan approval process, no monthly payments, and no interest to pay.
If you are trying to boost your credit score, paying in cash
will reduce your debt-to-income ratio. This is a measure of monthly debt
payments relative to monthly income. The higher your debt-to-income ratio, the
greater risk you are of defaulting.
Many people believe that paying cash is the gold standard,
regardless of what they are buying and how much it costs. However, car buyers
should understand that paying cash doesn't necessarily guarantee a better deal
on a vehicle. Most people aren't able to pay upfront in cash either. This is
why car buyers opt to get a car loan where they can make car payments over
time.
An auto loan is used to purchase a new or used vehicle. Car
loans are "secure" because the new or used car serves as collateral,
giving the lender recourse should the borrower default. As such, the annual
percentage rate (APR) on auto loans is generally lower than other types of
loans. However, to qualify for low auto loan rates, a good credit score is
typically required.
The way an auto loan work is that borrowers make regular
monthly payments over the determined term. If you make each payment in full, at
the end of the term, the vehicle will be paid off in full and you will own it
outright. However, the exact terms and conditions of your car loan will be
contingent on who the lender and your credit history. It's important to explore
all options to get the best car loan.
Taking out a loan is one of the most common ways that
Americans finance a new or used car. In fact, at any given time, around 30
percent of the U.S. population is paying off a car term. There are many
different lender options from banks and credit unions to car financing
companies and auto dealerships.
While an auto loan is typically secured by the vehicle
itself, the interest rate, monthly payments and repayment terms, and other
details are determined by the type of lender and the borrower's credit history
and financial situation. You will encounter many different lenders, each with
unique auto loan options. Let's review the ones you will likely encounter based
on the two primary types of auto loans: direct and indirect.
Also called "direct financing," direct auto loans
are made directly to you from a lender—there is no middleman. Examples include
banks, credit unions, and online lenders. Since it isn't tied to a specific
vehicle, a direct loan lets you shop and compare several cars to purchase. With
the freedom to get quotes from several lenders, you can choose the best loan
terms and rates (rather than taking the package you match up with).
What Is the Process for Direct Auto Loans?
With direct financing, you need to manage two separate
transactions: getting the loan and buying the car. First, you will prequalify
with a few different lenders so you can choose the best loan term for your
situation. After you get your loan approval, you'll need to visit the
dealership and buy your new or used car. Finally, you will start making monthly
payments on your auto loan.
Traditional Banks
When car buyers consider places where they can apply for
auto loans, a bank is likely top-of-mind. Banks offer a wide range of financial
products and services—such as checking and savings accounts, mortgages, and new
car loans. They usually have personnel on hand at a local branch to answer
questions and assist with paperwork. Additionally, banks offer opportunities to
refinance an existing loan at more favorable interest rates.
A bank might be your first choice, but remember that they
often have higher costs when it comes to loan applications and servicing fees.
Banks can also resell loans to other banks or financial companies. This may
mean that fees, interest rates, and procedures may change—often with little
notice.
Who Are Bank Car Loans Best For?
Traditional banks generally offer competitive loan terms on
auto financing to consumers with excellent credit. To get the best auto loan
rates from a bank, an above-average credit score is a must. Your credit score
will affect the interest rate, so it's a good idea to check your credit reports
before applying for a car loan.
A low credit score doesn't mean you'll automatically be
denied, but you should expect the borrowing costs to be higher. You should take
steps to improve it before applying for a car loan at the bank can result in a
lower annual percentage rate.
Credit Unions
A credit union is a non-profit financial institution that is
owned and controlled by its members. Like a bank, a credit union provides a
range of financial products and services to its members. Credit unions are
popular with consumers because of the favorable rates and terms offered. They
also focus on providing excellent customer service.
Every federal credit union in the U.S. is overseen by the
National Credit Union Administration (NCUA). They are an independent government
agency that provides chartering and supervision. The NCUA is responsible for
ensuring the safety and soundness of the credit union system. They also protect
the rights of credit union members.
Who Are Credit Union Car Loans Best For?
To get the best deal on an auto loan from a credit union,
you will need to be a member. Unfortunately, joining a credit union isn't as
simple as opening a bank account. You must meet their membership requirements
to join.
Common requirements include living in a specific region of
the country or working for a particular employer. If you meet a credit union's
requirements and become a member, it will qualify you for the low auto loan
interest rates they offer.
How To Get the Best Car Loan at a Credit Union
When applying for an auto loan, it's a good idea to have a
clear understanding of your budget and what you can afford. You should also be
prepared to provide the credit union with information about your income,
expenses, and employment history.
It's important to shop around and compare rates from
multiple credit unions to find the best deal. Be prepared to negotiate with the
credit union if you think you can get a better rate or more favorable terms. By
doing your research and being an informed consumer, you can get the best deal
on an auto loan from a credit union.
Who Are Online Lenders Best For?
Many online lenders operate in the subprime credit area of
car loans. This means having a low credit score isn't an automatic
disqualifier. For those who have poor credit scores, an online lender may be
one of the only options available. If you have bad credit, improving your
credit score even a few points can make a difference in how much interest you
pay.
Indirect auto loans are loans brokered by the dealership
where you are purchasing your car. Once you found the vehicle you'd like, the
dealership puts together an auto loan package from lenders in its partner
network. So, while direct financing involves two transactions—one with the auto
loan lender and one at the dealership to purchase the car—indirect financing is
all done at the dealership.
What Is the Process for an Indirect Auto Loan?
Indirect auto financing is when an auto loan lender offers
financing to the vehicle dealership. They then pass the financing along to the
buyer, who will make the monthly payments to the lender until the loan is paid
off.
Most vehicle ads you see on TV will include indirect auto
loan offers. These offers are usually promoted to "well-qualified
buyers" and direct car shoppers to their local dealer. In this case, the
manufacturer is the lender, the local dealership is the broker, and you are the
borrower.
The Dealership's Finance Office
Dealer financing is typically an indirect financing option
offered by the car dealership that is selling you the vehicle. Both independent
and franchise dealerships (dealers that work directly with a manufacturer)
offer in-house financing. This may be through a finance company owned by the
manufacturer, the dealership, or a third party.
Dealer arranged financing is available exclusively to
customers who finance through the dealership. It typically offers competitive
interest rates and special promotions, such as no or low interest. Dealership
financing can also be convenient since you can complete the entire transaction
at a single location.
Get the Best Car Loan From a Dealership
Like with other lenders, getting great car loan rates from a
dealer involves a little bit of research and preparation. Start by checking
your credit score and report to get an idea of the auto loan interest rates you
may qualify for. Next, shop around for interest rates from multiple lenders to
compare and get a sense of what is available. Bring all this information with
you when you go in person to the dealership.
When you visit the dealership, negotiate the price of the
vehicle and the loan separately. Don't be afraid to walk away if the car loan
you are offered is not competitive. If you were pre-approved through another
lender, bring that loan offer with you to use as a negotiation tool.
Perks of Dealer Financing
Keep in mind that dealerships may also offer additional
incentives that add value to the loan. These can include complimentary oil
changes, upgrades, winter tires installation, and even custom MOPAR parts done
at the body shop. Dealerships can also include a trade-in value for your
existing vehicle. However, be sure to carefully evaluate these options and
understand the additional cost involved.
1. Shop Around
To get the best deal on an auto loan, it is important to
make sure the financing is good. This can result in lower interest rates and
monthly payments. Shop around and compare the rates of car loans from different
lenders, such as your bank and the dealership. Comparing rates from different
lenders will help you identify the car loan package that saves you the most
money.
Shopping around for car loans will also give you more
bargaining power when negotiating with the dealership. Knowing the interest
rate and terms of auto loans you are qualified for gives you leverage in
negotiations. By taking the time to shop around and compare rates, you'll
potentially save thousands of dollars over the life of your car loan.
2. Know Your Credit Score
Regardless of the lender you end up choosing, your credit
score will impact the interest rate you are offered. So, it's important to get
a copy of your credit report to know where you stand when applying for car
loans.
You can request a free copy of your credit report annually
from each of the bureaus at AnnualCreditReport.com. Additionally, you can purchase your
credit score directly from the credit bureaus or from other financial services
providers.
Some websites and apps also offer free credit score
estimations based on information from your credit report. However, these scores
may not be as accurate as the scores obtained directly from the three credit
bureaus.
3. Negotiate the Price
Before you step foot in the dealership, research the make,
model, and options you want on your car. You should compare prices at different
dealers to make sure the price is fair and in your budget. You can do extra
price research by checking the fair market value on sources like Edmunds and
Kelly Blue Book. This will give you an idea of the average price for a similar
make, model, and year.
If you go with a dealers financing, try to negotiate the
car's price separately from the loan terms and interest rates. Splitting the
two transactions can help you have more leverage to negotiate and maximize
savings. After all, getting a better price on your new car means you will need
to borrow less and can make smaller monthly loan payments.
4. Consider a Shorter Loan Term
A shorter-term car loan can have several benefits: First,
you will pay less interest over the life of the loan. Secondly, you will pay
off the car loan faster, which means you will own the car outright sooner.
Lastly, you will have a lower monthly payment as compared to a longer-term
loan. This will make it easier to budget for car expenses.
However, keep in mind that car loans with shorter terms may
also come with higher monthly payments. If you like the idea of a car loan with
shorter terms but can't afford a high monthly payment, ask about prepayment
penalties. If there are no prepayment penalties, you can put extra money
towards your monthly payments and pay off your car loan sooner.
5. Qualify for Low-Interest Rates
Qualifying for low-interest rates will save you money over
the life of the car loan. To increase your chances of getting a low rate, you
can take the following steps:
The most important thing is to be prepared and do your
research. This increases your chances of getting a low-interest rate on your
car loan.
6. Make a Larger Down Payment
When you make a bigger down payment on a car loan, you
reduce the amount you need to borrow from the get-go. A smaller car loan means
lower monthly payments and better overall interest rates since you are
borrowing less money.
A bigger down payment may also demonstrate to the lender
that you are a responsible borrower. It could increase your chances of getting
approved for a loan or receiving a lower interest rate. Additionally, a larger
down payment can also help you build equity in your vehicle more quickly.
7. Read the Fine Print
As with any contract, you should always be sure you
understand all the terms and conditions before you sign. Double check the
annual percentage rate (APR), the length of the loan, and how much your monthly
payments will be. Don't forget about sales tax and any government incentives
you may be eligible for!
Be aware of fees and penalties and consider how each can
impact your situation. For example, if your loan terms don't allow prepayment
without a hefty fee, it may cost you more to pay off the loan early. Make sure
to understand if the interest rate is fixed or variable and what happens if you
miss a payment. Pay close attention to the loan terms on late payments and
other terms/conditions that you might need to be aware of.
8. Consider a Used Car
When considering whether to buy a new or used vehicle, a
used car can be a more cost-effective option. It typically costs you less to
finance and has lower insurance premiums. A used car may come with a lower
price tag. This can make it easier to finance with a lower down payment or even
paying the car's out-the-door price upfront with cash.
Purchasing a used car doesn't automatically mean high miles
and dated styles either. Many car shoppers are surprised to learn that the make
and models from the previous year are available at affordable prices.
9. Be Aware of the "Upside Down"
While every car loan term is different, it's important to
avoid getting into a situation where you owe more than your car is worth. This
situation is usually called "negative equity" or being "upside
down." This can happen when the value of the car decreases faster than the
amount they have paid off on the loan.
Should someone with negative equity need to trade or sell
their car, they may find that they owe more on the loan than the car is worth.
They will then have to pay the difference out of pocket. Negative equity can be
a burden for people trying to purchase a new car or refinance their existing
loan. It can make it difficult to secure a new loan with favorable terms.
10. Gap Insurance
In certain situations, gap insurance can give you peace of
mind if you are concerned about your loan being "upside down." Gap
insurance is a type of car insurance that pays off the balance of your loan if
your car is totaled or stolen and you owe more than the car's depreciated
value. Gap insurance is only available to the person who holds the original car
loan or lease on a new car.
If you made a small down payment, lease your car, or have a
vehicle that depreciates quickly, gap insurance can be a good investment.
Depending on where you buy car insurance, gap insurance is usually an
affordable add-on. It can help ensure you aren't stuck paying the remaining
loan amount on a vehicle you no longer drive.
An individual's credit score is a significant factor in
determining the interest rates for car loans. High credit scores suggest to
lenders that you are a lower risk borrower. They are then more likely to offer
you lower interest rates. On the other hand, a lower credit score can result in
higher interest rates.
Getting a Car Loan With Less Than Perfect Credit
Getting an auto loan with poor credit is possible, but you
should expect the interest rates and loan terms to be less favorable. You may
have to pay higher interest rates or make a bigger down payment to compensate
for the increased risk to the lender.
Some lenders may have minimum credit score requirements that
you need to meet to be eligible for a loan. It's still possible to find lenders
that specialize in helping people with bad credit obtain auto loans but make
sure to do your research. Remember to compare offers from different lenders to
ensure you get the best deal possible.
Some lenders offer loans to those with no credit history,
but the interest rates may be higher due to the higher risk. In this case, a
co-signer with established credit may help to secure a loan with better terms.
It is also possible to build credit by taking out a secured
credit card. Establishing a good payment history can affect your credit score
positively. It can increase your chances of getting a car loan with better
terms in the future.
Whether you are a first-time car buyer or adding a new
vehicle to your household, buying a new car is a big decision. Thankfully
Landmark Dodge Chrysler Jeep Ram is here to help. Give us a call at
816-521-2699 to talk with one of our finance professionals. Or, apply
for pre-approval of an auto loan online today!
