Shop around to get the best rates and terms on car loans
Buying a car is exciting. But buying a car and getting a car loan are two different things. When it comes to financing a car or any other vehicle, dealerships often lure potential buyers with zero-interest loans and no-money-down financing. Although these might be competitive offers, they often are not available to all buyers.
Shopping around can help you get the right loan with the best terms. First, consider where you will obtain your auto loan, either through a direct lender — such as a bank or credit union — or through the dealership where you’re buying a vehicle. Then, compare rates and terms with a variety of auto lenders and get preapproved from one before you go to the dealership.
$5,000 to $100,000
12 to 96 months
< 1 to 48 hours
Although it may not be the most exciting part of your car buying experience, it is essential to shop around for an auto loan, because a hasty decision can cost you thousands of dollars over the life of the loan. The following steps can help you with your initial planning.
Identify how much car you can afford. If you need a car for practical reasons, plan to spend about 10 percent of your monthly income toward your car payment, which includes principal, interest and insurance. If you’re interested in – and can afford – a more luxurious vehicle, 20 percent may be reasonable.
Identify how often and far you’ll be driving. If you need an affordable, short-term vehicle to cover minimal mileage, leasing might be an attractive option.
Your credit score will have the largest effect on your eligibility for lower interest rates and more favorable loan terms. Start working on settling late payments and improving your score as soon as possible.
Buying a new or used vehicle can affect your insurance premium. Check with your insurance provider to see if there will be any payment changes.
Before going to the car lot, consider getting prequalified or preapproved for an auto loan from a lender. Preapproval provides you with an idea of the loan amount, terms and interest rate you can expect to get with your credit and financial situation. This is useful in knowing your limits and to use when negotiating at the dealership.
Dealerships offer attractive financing terms, but they are usually applicable only to those with strong credit. It is smart to first compare lenders on your own and get preapproved before going to the dealership.
Auto loans are either secured or unsecured:
Secured auto loans typically use the vehicle being purchased as collateral against the loan, but can use another of the borrower’s assets. The collateral is repossessed if you don’t keep up with the loan payments.
Unsecured auto loans do not require collateral that can be repossessed in case of borrower default. Interest rates are often higher, however. In essence, it is a personal loan, where the money can be deposited in your account even before you select your car.
Auto loans take into account the principle amount — the purchase price minus rebates and down payments — the length of the loan and the annual percentage rate, or APR, which is how much you pay each year to borrow the money in terms of the interest rate and associated fees. These costs are totaled and divided into your monthly payments.
The auto loan interest rate structure can be simple or pre-computed.
Interest rates on auto loans can range from 3 percent to 13 percent. Lenders base their rates on many factors.
If you are unhappy with the existing conditions of your auto loan, you may be able to refinance and obtain lower monthly payments or a lower interest rate, even if you have poor credit.
Refinancing your auto loan is particularly useful if your credit has improved since you took the auto loan or the initial loan had a high interest rate. Compare at least two auto loan refinance options to see what rates are available to you and if it makes sense for your financial situation.
Buying out a car you’ve leased can be wise if you like the vehicle and the financials make sense. Similar to refinancing, an auto lease buyout loan is the repackaging of an existing debt. The following steps can help buy out your leased car.
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