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Many drivers dream about the new car. However, the financial situation often does not allow you to buy a new or used car right away.
The easiest solution in such a situation is an auto loan. However, before deciding, please carefully calculate so that the auto loans amount, total cost, and annual interest rate do not put you in financial trouble.
What to pay attention to before signing a contract for an auto loan? What are the advantages of such financing? Is it better than a cash loan? Where to find the best auto loan rates? We're taking on car loans today!
What is an auto loan?
An auto loan is a particular purpose loan granted to purchase a new or used car. Of course, you can also get an auto loan for other vehicles, such as a motorcycle or a caravan, with multiple lenders. However, it is the most common to take out a loan for a passenger car.
Before you decide to take out a loan, you must check your creditworthiness - this will determine the decision to grant a loan and its terms.
If a finance company has given you information that you may be eligible for a loan, study the offer carefully.
What are the significant types of auto loans?
When choosing auto financing, you can choose from three different auto loans. They differ in the size of the down and installment payments and how the borrower will repay the debt. So let's take a look at them one by one.
Standard auto loan
A standard auto loan contains all of the elements described earlier, where the annual percentage rate (APR) is essential, as it allows you to calculate the total cost of the loan quickly.
Once you are deemed creditworthy and have chosen a car and loan term, the bank will divide your loan into installments that you will pay off systematically.
Single-payment loan
You can also choose a single-payment loan, which involves a high down payment of at least 50 percent of the car's value.
After one or a couple of years, you will have to repay the rest of the current auto loan in a lump sum. So you see that the total amount you have to pay consists of 2 parts. The pros of this loan are that you can spend less interest by making a down payment, so the total cost of the loan is lower. First, however, you must have sufficient financial resources to start.
A balloon loan
A balloon loan is the third form of an auto loan. The borrower systematically repays their obligation, but the last payment is called a repayment payment.
What does this mean?
It is the highest payment, ranging from 20 to 40% of the car's value. However, this type of loan has a positive side: usually, 2 to 5 years, the borrower makes low payments during the loan term.
At the last installment, the customer can sell the car back to the bank and decide to buy a new one. After a few years, the car's value will decrease so much that it will be enough to cover the redemption payment. But there is one thing: these loans, like single-rate loans, are offered mainly by automobile banks affiliated with automobile manufacturers! So the buyer is limited to one brand.
How to apply for a car loan?
How do I get a car loan? There are several auto loan lenders. You can apply for one at:
bank branch
dealer's showroom - you can use this option by financing your car purchase at a bank affiliated with the importer of a particular car brand
lender's website
finanso.com car loan service helps you to get multiple loan offers, figure out the most competitive rate and start the loan process with the lending company
Online lenders? A loan application for buying a new car online in 15 minutes is also available. In this case, you have time (e.g., 60 days) to find the best car and auto lender for you and complete other formalities.
What are the main requirements for obtaining an auto loan?
The main requirements for the borrower - are residence in the state of the bank's presence and the ability to pay.
Lending companies have different requirements for their borrowers, compliance with which virtually guarantees a car loan. These are standard parameters.
The requirements
Citizenship of the auto loan borrower
The first document you will need for an auto loan is a passport; it has half of the necessary information about you, such as citizenship. Most lenders require U.S. citizenship to get a loan. However, some lending institutions will give car loans to foreigners. The main thing is that the person must have a permanent residency in the country long enough to pay the debt. It is better if it is work-related.
Registration for an auto loan
Registration is not only crucial for foreigners but also for U.S. citizens. Banks require that the borrower and seller live in the same state. It allows the lender to thoroughly check the car and the borrower before making the deal, thus minimizing the risks.
Borrower's age
Of course, only adult citizens can make any deals with the bank. Most lenders set the lower age limit at 18 and the upper age limit at 55 for women and 60 for men. The age limit signals the time by which you must fully repay the loan.
Solvency of the auto loan recipient
The following thing playing a significant role in determining interest rates, loan terms, and getting or not getting an auto loan, in general, is the ability to pay. The borrower's income should be sufficiently high, stable, and preferably official (with a certificate). If half of your salary is enough for the loan's monthly repayment, it will be a valid argument for giving you money.
The employment history of the auto loan borrower
Your employment history should also meet the requirements. It indicates the reliability and stability of the borrower. It's good if you have at least six months (sometimes a year) of continuous employment experience and at least three months of knowledge at your last job - then your employment history will appeal to lenders.
Credit History and credit score for Auto Loans
When dealing with lenders, we can say that your credit report and FICO score are the borrower's face. For example, before granting an auto loan, each company checks the client's history through its databases - it records all the times a person has applied for a loan, even if the bank denied the borrower a loan. There is also information about overdue payments, court proceedings, etc. They can also make requests to major credit bureaus.
Specific requirements for a car loan borrower
When choosing a lender and auto loan program, it is essential to keep in mind that not all institutions impose the entire list of these requirements on their borrowers. Sometimes some of these conditions can be excluded, and periodically, on the contrary, lenders can get new ones. For example, a lending institution may require that you work in the state in which the bank's lending unit operates. Or, let's say a customer must have a good credit history, but if he does not have one, the bank will not give him a loan.
Ways to get auto loans
Secured loans
A secured loan or secured credit is a transaction in which a vehicle acts as collateral for a debt. For example, if you cannot make a payment, the bank has the right to take the car and resell it to recoup the loss. In such a legally enforceable transaction, the lender holds the collateral and grants title to the vehicle until the borrower repays the loan.
Most car loans are just that. It will help if you also consider that high competition in consumer lending forces banks to develop various programs that can interest one or another category of consumers. Car dealerships offer customers other types of loans.
Direct financing
Direct financing is a transaction in which a bank provides funds to buy a car from a dealer. The car dealer will receive the funds into the account, and the borrower will repay the loan based on the agreement concluded with him. You can find this form of lending in many car dealerships.
A car dealership may provide in-house financing services on a "buy here and pay here too" basis. However, the loan deal is between the buyer and the dealership and is often used to buy cars with "bad credit," meaning the borrower has a bad credit history, so they are limited in the number of lending options.
The interest rate for the deal will be considerably higher. The subject of the agreement can also be a used car.
It is also possible to lease a car with subsequent redemption. This type of leasing allows the buyer to make payments to the lender until he owns the vehicle. Such a transaction is called a lease repurchase.
Express Loan
An express loan is considered a standard loan with more straightforward terms. You won't need proof of income, but you will need to pay 30 percent of the car's value. The rate on an express loan can also be higher. A car in such a deal is collateral to the transaction, and you can not sell or lease it until you pay it off.
Unsecured loan
An unsecured loan is a transaction where you do not need any collateral. This type of deal has a higher interest rate, and the lender will have to shorten the loan terms to protect itself from high risks. These deals are also called unsecured loans.
How to repay a car loan debt
There are several ways to make a repayment on a car loan according to your loan details available to every borrower. Every method has its advantages, and the borrower chooses the most convenient for them and does not require payment of a hefty fee.
Let us list a few basic ways to pay your car loan debt so that in the future, if you want to take out a car loan, you do not have problems with the choice and you do not lose your time:
The borrower pays from the bank account with automatic payments. If you have a current account at the bank where you are getting the car loan and monthly and regular payments, you can arrange for automatic debits. This repayment method is convenient since you won't forget about the following amount. But if your income drops down, the bank will deduct almost all the money as payment for the car loan, and this is unlikely to bring you much joy.
Online banking. You can also set up automatic transfers or make quick and convenient manual loan payments with online banking. Just enter the details once, add the cost to the templates, and the following times you can make a payment in a few clicks.
Payment by check. Even though paying by check is slowly becoming a thing of the past, some borrowers are still comfortable using them. You can send a statement to the bank every month, and it's acceptable as well.
Pay at a bank branch. Do you have enough time to go to a lending branch every month and make your car loan payment in cash? Fine, this option is also available to you.
Regardless of which payment method you choose, it is essential not to fall behind on your payments, as this can hurt your credit history and your ability to take out loans in the future.
Pros and cons of car loans
Car loans VS Cash loans
Sometimes borrowers wonder what's more profitable - a car loan or a cash loan to buy a car. So how do they differ? The difference is fundamental - in the first case, the borrower buys a car, and in the second, he uses the money for any purpose.
In the case of a cash loan, the bank does not go into how you will spend the money. However, this has financial consequences - the total cost of the loan is higher.
Even when the loan amount is lower, the interest rate is higher, and, therefore, the amount to be paid is also higher.
Nevertheless, getting a cash loan has one big plus - you don't have to worry about securing the loan. In addition, you will be the sole owner on the registration certificate, so you can sell the car whenever you want.
So what about an auto loan? What are its benefits?
Pros of auto loans
Why is it better to choose this type of auto loan? Many people choose this form of loan for several reasons:
Lower cost of the loan - it is simply cheaper to take out an auto loan due to the security. We're talking about a registered mortgage, title transfer, pledge of the vehicle's map, or assignment of the auto insurance policy.
Lower interest rates - banks compete in the market and offer desirable terms. The interest rate and commission can be meager (i.e., the actual annual interest rate, too!).
More considerable loan amount - getting a bigger loan is easier when you intentionally decide to buy a car. Of course, this also depends on your creditworthiness and bank offers.
Used car or a new car - you can also buy a used car with the loan's proceeds, although the bank specifies its maximum age (most often 8 to 12 years old). The cost of the loan will also depend on which car you choose.
Loan Term - a lender can extend repayment of a car loan for ten years. The longer your repayment period is, the fewer monthly payments you will pay.
So, it's clear that when you have a car loan or a cash loan to choose from, you should choose the former. But unfortunately, it has a few drawbacks, and it's time to bring up this unpleasant topic.
Cons of auto loans
Despite its undoubted advantages, an auto loan also has some disadvantages. For example, what do you have to agree to if you want your loan's actual annual interest rate to be as low as possible?
Bank collateral - a registered mortgage, title transfer, or deposit limits a borrower's ability to decide freely about a car. He must pay off the loan first to be able to sell it voluntarily.
Mandatory auto insurance - the bank does not analyze the driving style of the client taking out a car loan, so it requires an insurance policy. Thanks to it, the lender protects itself from the driver's incident and the vehicle's destruction by the forces of nature and theft.
Formalities - since it is a target purchase, you need to consider all aspects of the purchase and registration of the car.
Looking at the ratio of advantages to disadvantages, the former is more excellent. If you plan to buy a car for years, an auto loan is a perfect solution. Although, even someone who is planning to replace the car they are borrowing after a shorter period will find an installment plan option.
Legal regulation of the car loans market in the USA
Of course, the Consumer Financial Protection Bureau (CFPB) regulates the auto loan market in the United States, and the CFPB is responsible for all consumer interests and actively monitors compliance. If financial institutions offer auto loans to their customers, the CFPB will hold the safety of their operations.
What does the total cost of a car loan include?
Remember that the total cost of auto financing is not just the amount borrowed multiplied by the interest rate. It includes all the obligations associated with the signed credit agreement:
interest,
fees,
commissions,
taxes,
margins,
costs of additional services.
To make it quicker and easier to compare loan offers from different financial institutions without using complicated formulas, we recommend paying attention to the annual percentage rate (APR).
Car loan companies protect themselves against borrower insolvency in several ways. These include:
registered pledge,
transfer of ownership as collateral,
deposit of the vehicle card,
assignment of rights from the car insurance policy.
What are the securities mentioned above? A registered pledge means seeing the lender's name on the registration certificate. If you have financial problems and stop paying the loan for the car, the bank will be able to terminate the contract and sell the vehicle.
In the case of a transfer of ownership, not only will you become the owner of the vehicle, but also the bank, which will state the percentage of ownership in the contract. So you won't be able to sell the car freely, make changes to it (e.g., installation of a gas system), and you will have to report foreign trips.
Another way to stop the lending company from selling a credited car is to deposit a vehicle card - without it, you can not make such a transaction. But, of course, after repayment of liabilities, the vehicle card will go to the car owner.
Assignment of rights under an auto insurance policy means that the bank will receive compensation if the borrower commits an accident. Therefore, the auto loans cost will not increase, but you will have to pay for repairs to the vehicle out of your pocket.
The protections described above are not just there to make life difficult for the borrower. They will lower the total amount you will have to pay to the bank for the car loan. Additionally, the driver taking out the loan chooses the form of collateral - they do not all apply to one loan simultaneously.
The actual annual interest rate and monthly car payment
When calculating monthly car payment, it takes into account all fees, commissions, and other costs associated with providing a loan:
preparation fees,
fees for review of the application for a loan,
mortgage processing costs,
registered collateral,
car insurance,
account maintenance fee for payments.
New customers are always overpaying.
Note that the interest rate on cash loans issued to the riskiest from the bank's point of view, i.e., people who do not use other services, is the most expensive.
Customers who have had a bank account for many years and have a good credit history will almost certainly be offered better terms by the bank.
Recommendation: Always use the auto loan calculator
Important information about monthly payments is also in the signed agreements, but unfortunately, borrowers don't read them and don't know how much their cash loan costs. Banks have the right to charge high fees for a loan.
However, in advertising and bank brochures, information about the actual cost of "excellent credit" is skillfully hidden and indicated in small print so that the client ignores it.
Hopefully, this article has given you information about car loans in the U.S. It will help you choose a loan with the best annual percentage rates and calculate the estimated monthly payment. Carefully analyze all car loan offers before you borrow new and used cars.