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If you want to purchase a car and don't have money to buy it right away, you can get an auto loan. Whether it's a new or used car, the cost of your loan will mainly depend on the loan rates and terms. The rated are constantly changing according to the market assumptions, and lenders keep them competitive, altering their offers accordingly. To make a good use of your auto loan, you need to carefully examine the loan rates and compare the lenders.
What is an auto loan?
Car loans are secured loans which permit the borrowers to purchase a vehicle by essentially pledging it as collateral. Car loans are very popular, especially with people looking to purchase a brand-new vehicle.
Car loan usually necessitates collateral, which means that the value of the car itself is what provides the lender with protection against default. In the event of default, the car loan lender will be able to keep the vehicle as well pursue legal action and take other actions against the borrower who is responsible for the default.
Types of auto loans
Main types of car loans
There are two major types of car loans: secured and unsecured. The first is characterized by the above-mentioned collateral that almost always comes in the form of the purchased vehicle. A borrower can use a different collateral but some auto lenders might not accept it. In a secured car loan, the lender reserves the right to repossess the vehicle in case the lender defaults.
The second type happens when the borrower decides to take the loan in an unsecured way. In other words, they are not providing any collateral. Because of the higher risks involved, the rate usually tends to be higher.
For instance, an average interest rate of a secure loan ranges between 5.5% and 21.5% whereas the one for an unsecured loan can range from around 7.6% to 113.6%. The stark differences don't stop there as unsecured car loans have a tendency to have much shorter average terms (3 years compared to 5 and a half for the secured ones).
Additional types of auto loans
First, we will present the commonly encountered types of secured loans:
Traditional Loans. It's the ordinary option that most auto loan lenders push for. The cars are used as collateral. The rates differ based on whether it's a new or used car: the auto loan rate is higher in the case of an old car.
Balloon Loans. This category of auto loan is characterized by small monthly payments during the course of the first few years of a loan. Then, the borrower has to make one big payment.
Commercial Loans/Fleet Loans. These are collateral-based loans that businesses use.
The popular types of unsecured loans include credit cards, line of credit, and personal loans. The most significant thing is that you need to have excellent credit and a stable source of income to qualify for this type of auto loan.
Aside from several types of unsecured and secured auto loans, there are a few more. Based on different classification systems, here are a few examples of other kinds of auto loans:
Simple Interest Loans. In this type of loan, the interest is paid off first. This loan is usually a good choice for people that want to pay off their loans as quickly as possible.
Pre-Computed Interest Loans. This option is better suited for people that have no intention of paying off the loan earlier than scheduled. You won't be able to save money on interest with this kind of car loan.
Direct Auto Financing. With this type of car loan, you don't need to interact with anyone other than your auto lender.
Indirect Auto Financing. This type of auto loan requires the involvement of a third party that acts on your behalf and, in theory, brokers a better deal.
Pre-Approved Auto Loans. This one requires a hard pull at your credit score to see if you qualify. The conditions won't change because it makes little sense for a lender to alter them.
Pre-Qualification. In contrast to pre-approval, this one doesn't necessitate a hard credit check. The rate and other terms and conditions can be altered in hopes of swaying the decision of the borrower.
Military Auto Loans. Car buyers that served in the US Military can qualify for car loans that offer better rates and terms than average.
BHPH Loans. Buy-here-pay-here car loans are characterized by being tied to the dealer. Instead of borrowing from a bank, any of the online lenders, or a credit union, you opt for in-house financing from the dealer.
Further types of car loans that didn't make the list include lease buy-out loans, private party loans, and car title loans.
What affects auto loan rates
Most of the time, it is difficult to say for sure what provides the most significant impact on loan details. However, there are a few key factors that are commonly presumed to influence the deal you get in a major way.
The first factor to take into consideration is your credit score. The higher it is, the better loan options are presented to you. Different lenders set a different minimum credit score requirement, but it can be anything from 290 to 900. The most common minimal score is 700. Alongside your score, you'll also have to consider the fact that loan interest will hinge on your current income. This consideration is rather significant because your car loan rate will depend heavily on the stability and amount of your income. In other words, some car lenders impose a minimum salary requirement.
The duration of your car loan also plays a vital part: the longer it is, the smaller the rate will be. It makes sense for the lender to prolong your loan term because they know you're more likely to pay it off. They will also receive more money in interest. One more thing that impacts auto loan rates is you making a large down payment or trading in your old car. Making a down payment, especially a substantial one, is an excellent move that will help you get hold of the best auto loan rates.
Two more things that might influence the auto loan rates are pre-approvals and dealers' profit. The first one refers to when the lender pre-approves a certain set of conditions for you - you'll avoid a hard credit check and you'll have more leverage when negotiating with multiple lenders since you know what you'll be getting. As for dealers' profit, it's an option available to those that go the BHPH auto loan route. You'll be able to negotiate a better deal if your dealer is ready to ask for a smaller percentage.
How to qualify for a good auto loan rate
It's never a wise idea to accept the very first car loan offer you get. Here are a few methods that will help qualify for the best auto loan rates imaginable:
Look up your credit score and make an improvement. It's very important to be well-acquainted with your own credit history. It's a wise strategy to try and reach an excellent credit score because that way, you qualify for much lower car loan interest rates.
Conduct your own research before applying for a car loan. You should learn more about the auto loans you're seeking out and the types of lenders available to you. Once you get an idea of what you're getting into, dig deeper into all the details.
Pick based on the loan amount instead of the monthly payment. Some lenders might try to pull a fast one and set a lower rate by stretching out the loan term. Obviously, the full loan amount should be your main consideration.
Be sure to thoroughly research every single detail. Examining and understanding the fine print of the agreement is necessary in order to get the best deal possible. When you're applying for a car loan, you should be sure to read over all the documents thoroughly, making sure you have a perfect understanding of every term.
How to get an auto loan?
The process of applying for a car loan is decidedly straightforward. It begins with you checking your credit score to see if it's high enough to qualify for a loan. It's essential to ensure that your credit score is at least above 290. Then, you need to shop around in search of the best auto loan rates. Apply for car loans from at least 5 different lenders and see what you get. Keep your cool and remember that most lenders can be reasoned with and will definitely do their best to accommodate you.
Then, you need to examine the most suitable offer and set your budget accordingly. Pick a vehicle that you want to purchase and enter the final stage of this process. Don't forget to never miss out on your monthly payment. Consider setting up automatic payments.
How to select an auto loan lender?
Whether you want to turn to credit unions, Bank of America, a third-party lender, or the dealer itself, there are a few things that you should really pay attention to, including:
Auto loan rates. The best lender is not always the one that offers the best auto loan rates, but it can sometimes be the one that you get the best deal with.
Monthly car payment amount. The amount that you will have to pay every month will determine whether or not you'll be able to afford the vehicle purchase.
Loan term. The loan term should definitely influence your choice of a lender.
Prepayment charges. If you plan to cover the cost before the term is up, you should definitely stay away from lenders that charge a pre-payment fee. Shop around for auto loan options that specify no penalty.
Guaranteed auto protection. It's additional coverage that can help reduce the financial risks related to car accidents and major repairs. Think of it as additional car insurance.
100% coverage for a new or used car. In case you're not sure whether you want used or new cars, you need to find a lender that's willing to cover the entire cost of any vehicle.
How to refinance a car loan?
At its very core, refinancing your existing loan necessitates finding better deals. The main goal is to save money and find more manageable car interest rates. Refinancing makes sense for those who either improved their credit scores or are unable to keep up with the payments of their current loans.
The process of refinancing your loan is very simple. It begins with gathering the required documentation, namely: salary slips, the original contract containing all the loan details, and more. Then, you need to examine your credit scores and think of ways of improving it. High credit scores can help you qualify for the lowest interest rates possible.
Then, you need to apply for refinancing. Apply with several lenders to figure out who offers the most competitive rates. Once you have all the information regarding the loan options on your hand, you will need to carefully examine and evaluate them. Read the contract to determine your monthly payments and other variables and make your decision. Don't forget to shop around for additional car refinancing rates if the loan options presented are not as attractive as they seem.
The final stages of the application involve you finalizing the deal with the lender of your choosing.
