Once you decide on buying a car and you feel the need to apply for a loan, it is important that you understand a little more about the different financing options, hidden costs, as well as the duration of the loan. Based on your research and understanding, you can then choose the best option to ensure that you don’t pay more than you have to. Apart from getting the required information on the internet, you can talk to friends and family who have gone through the process.
There are two choices while availing a car loan. It can be availed through dealer financing or financed by a bank or credit union. In the case of the former, the mandatory information is collected by the dealer and forwarded to one or more prospective auto lenders. If you are availing car loans from a bank or third party financiers, you need to send an application directly to the bank, credit union or a finance company. This type of loan is referred to as a direct loan.
It is ideal to choose a direct car loan where the bank or credit union may pre-approve your loan. Pre-approval means that the loan term, interest rate, and the maximum loan amount offered will be quoted. This is based on factors such as terms of the transaction, your credit score, type of vehicle, and your debt-to-income ratio. This quotation or conditional commitment letter can be taken to the car dealer. Based on this document, you can negotiate the price of the vehicle along with accessories and extra fittings that you may require. This is one of the benefits of a car loan being pre-approved.
In the case of dealer arranging the third-party finance, the interest rates and overall costs are likely to be higher. This is because it will include the processing fee that compensates the dealer for handling and processing the car loans. For example, if a credit union responds with a 5% rate of interest, the dealer states the interest rate at 6%. The additional 1% would go to the dealer as payment for their services in putting together the car loan.
The average monthly car payments for a new vehicle are spread over 68 months, i.e., about five and a half years. The interest rates on car loans are steadily rising and are at an approximate cost of well over 4% annually. Car loans spread over 60 months are not the best way to finance a car, more so while purchasing a used car. While the monthly payments can be lower, you will have paid a much higher total due to higher interest rates and a longer period of repayment.
Certain types of auto dealerships finance car loans to borrowers with no credit or poor credit. Usually, the interest rate on such loans from dealerships is much higher than loans from a bank, credit union or other types of lenders. A special feature of this type of car loan is that the dealership fixes devices in the vehicle sold which help them repossess or disable the vehicle if there is a default in payment.
Seeking car loans for buying a vehicle is a big decision and it is best to examine all the terms before committing. A credit counselor will be of great help in reviewing the income and expenses and will aid in reducing debts.
