Auto Loan Facts You Need to Know
When shopping for an auto loan, rates offered by different lenders will vary widely for a number of different reasons. Some lenders are more competitive than others in that they offer lower rates in certain circumstances. Other lenders charge higher rates, but make loans available to borrowers, other banks or lenders may not be willing to service. So, in order to understand how car loan interest rates work and how to find the most competitive car loans, there are a few facts regarding car loan rates that you should be aware of.
Credit Rating Directly Affects Rates
The interest rate that you are offered will usually directly reflect your personal credit rating and score. Simply put, banks and car loan lenders offer lower rates to people with good or excellent credit and charge higher rates of interest for people with bad or marginal credit. Your personal credit score is used as an indicator in determining the likelihood of a default on a car loan.
People with higher credit scores are viewed as more financially responsible and are considered much less of a risk than people that have demonstrated that they do not always meet their financial obligations on time. The difference in the interest rate charged to a person with a good or excellent credit versus that of a rate charged to a person with bad credit can range from as little as one or two percentage points to as many as 10 to 15 percentage points.
Shorter Terms Offer Lower Rates
Generally speaking, car loans that have a shorter term usually offer lower interest rates. For example, if you finance a car loan for five or six years, you will almost always end up paying a higher interest rate than you would if you had selected a repayment term of only two or three years. Banks and lenders view longer term car loans to be higher risk than shorter term loans. Therefore, banks are willing to accept a slightly lower interest rate for loans that are repaid more quickly. If you want to get the lowest car loan interest rates possible, always choose a term that allows for repayment of the loan in the shortest time possible – just make sure you can afford the payment.
Dealerships Often Profit on Interest Rates
Dealers not only earn a profit when they sell a vehicle, they can also earn money when you finance the car loan with one of their lenders. For example, if you apply for a car loan through the dealership, the lender may allow the dealer to charge you a higher interest rate than that offered. When this occurs, the dealership may increase the interest rate by as much as 2 or 3 percentage points and then receive the difference in the rate offered and the rate you finally agree upon. Depending, on the cost of the vehicle this could result in a profit for the dealership of a few hundred to a few thousand dollars. Of course, the dealer’s profit is paid by you over the term of the loan in higher monthly car payments.
You Can Negotiate Rates
When dealing with the dealership, don’t be afraid to try to negotiate a lower interest rate – especially, if you know you have good or excellent credit. If you believe the rate is a little too high, it probably is. If negotiations fail, take your car loan to a major bank or local credit union and get a better interest rate for your good credit car loan.
Before You Get an Auto Loan
For a successful auto purchase, you’ve got to get several things right: choose the right car, get a good price, and fund the purchase in the most affordable way. If you’re going to borrow for your purchase, the choices you make on your auto loan are extremely important.
An auto loan helps you buy a car that costs more than you can afford with cash. Unless you have a substantial amount of savings, you’ll probably borrow and pay off your vehicle with flat monthly payments. If you borrow wisely, you enjoy two important benefits:
- You’ll spend less (perhaps thousands of dollars less) on your vehicle
- You’ll have the flexibility to change vehicles and fund other goals within a few short years
Start planning for your loan long before you ever start looking at cars. Getting your ducks in a row ahead of time improves the chances that you’ll get a loan (and a car) that fits with your lifestyle. Plus, when it’s time to make a deal, you’ll be ready to proceed with confidence.
Key to a Great Auto Loan
Manage Your Credit
Your credit (in combination with your income) determines whether or not you will be approved for a loan. Your credit is your history of borrowing from other lenders have you borrowed before, and did you repay those loans on time? With a good credit score, you’ll get a lower interest rate, which means you’ll pay less for your vehicle (both in terms of the total interest costs, and the monthly payment, which is based on your interest rate).
Check your credit
review your credit reports before you apply for auto loans or visit a dealership. All US consumers are entitled to a free credit report under federal law, so exercise your rights. Make sure that your credit looks as good as it possibly can. Your lenders will largely make their lending decision on your credit score. Read through the report carefully and fix any errors that will drag down your score – they’re more common than you think.
Know How Much You Can Spend
Get a clear idea of how much you can spend (down payment and monthly payments) before you start looking at cars. If you fall in love with a vehicle before you know whether or not it’s in your budget, some salespeople can make it appear as if the car is affordable with fancy math and long-term loans.
Your down payment is an up-front payment – the larger your down payment, the smaller your loan (and the resulting monthly payments). It hurts to write a big check up front, but you’ll enjoy more flexibility later if you do so.
Your monthly payments are the regular payments that you’ll make for years to come. Keep these at a comfortable level because you never know if things will change. Your income could fall, or you might face unexpected expenses in the coming years. If you spend as much as you can today, you’re putting your future at risk.
Look at the Big Picture
Understand how loans work, and you’re better equipped to make smart decisions about your loan. When car buyers lose perspective, they commonly fall into two dangerous traps:
Focusing on the monthly payment (as opposed to the purchase price and total cost including interest)
Tunnel vision (the need to buy a certain car or certain features, even if those don’t fit your finances)
It’s tempting to focus on the monthly payment when deciding how much you can afford. Some auto dealers encourage this. Unfortunately, the monthly payment is easy to change: just make the loan last longer. Stretching out a loan for more years (for example, going with a seven-year auto loan instead of a four-year loan) makes for lower payments – but it also results in dramatically higher interest costs. What’s more, you’ve got a better chance of getting upside-down on your loan (when you owe more on the vehicle than it is worth).
Making a small down payment feels good today, but that means you’re borrowing more (which, again, makes it easy to get upside-down). Make sure you’re buying a car that you can truly afford and avoid taking on a loan that will come back to haunt you.
It is simple, but it is often overlooked. The most important point here is that you don’t have to get your auto loan from the dealership. Check with a credit union, bank, online lender, or P2P lending source. In most cases, your car dealer won’t have the best auto loan (but in some cases the dealer’s offer can’t be beat). By consulting with an alternate lender before you step onto the lot, you’ll be armed with knowledge of what’s available to you – and that gives you bargaining power.
Avoid Prepayment Penalties
Things change in life and flexibility is important. Your auto loan should also be flexible. Find a lender that will allow you to make extra payments or pay off the loan entirely without any penalties. It’s important to read the fine print – some “penalties” aren’t called “penalties,” and old-fashioned prepayment penalties have been outlawed in some states (so lenders have to find other ways to discourage payment).
Lenders sometimes ask about life and disability insurance when you buy a car. They’re not asking out of kindness – they’d like to sell additional insurance with your loan. Credit insurance helps to cover your loan payments, but it’s rarely a good deal to get credit insurance with your lender. Evaluate your existing life and disability policies that you own as an individual or that you get through your employer.
Again, gather information before you go shopping for a car, as you’ll want these details available. Plus, it’s just wise to know how you and your family are protected if something happens. If you feel like you need coverage, compare offers from several different sources, including an individual insurance agent that is not affiliated with your lender.
When you borrow money to buy a car, your lender is already protected: they can repossess the vehicle if you stop making payments – so focus on protecting yourself and your loved ones.
Car loan features explained
Fair enough if you’re waving your hand in the air with plenty of questions to ask, ‘what’s this?’ ‘What does that mean?’ ‘I don’t get it!’ Let’s break down and explain some of the features of a car loan.
- Variable interest rate: This means the interest rate on your loan will change throughout the loan term. The repayments on the loan will coincide with the fluctuating market interest rates.
- Fixed interest rate: The interest rate is locked in and will not change for the duration of the loan. Budgeting is made easy as repayments stay the same for the term of the loan.
- Comparison rate: This rate is as transparent as you can get! A comparison rate is inclusive of fees and charges as well as the interest rate.
- Extra repayments: This feature allows you to make advanced and additional repayments on your loan, so you can be debt free quicker than you planned. Shop around and find a loan that won’t charge you for making extra repayments.
- Redraw facility: Once you’ve paid off a portion of your loan, you can draw that money back out again. This feature may be handy to have for when an unexpected bill or health issue pops up.
- Payment frequency: This is how often and when you make repayments. The payment frequency is determined when you set up the loan and can be weekly, fortnightly, monthly or an agreed date.
- Loan term: This is the duration you have to repay the lender the money you have borrowed. With a secured loan the term can range from 1 to up to 15 years. An unsecured loan term is shorter from 1 to 7 years.
Car loan fees explained
- Application fee: Also referred to as a ‘set-up’ or ‘start-up’ fee. An application fee is a one off payment when you open up your car loan.
- Break cost fee: This is a charge or penalty you will receive when you pay off the full amount of the loan before the term is over. A break cost fee usually applies to a fixed rate car loan.
- Ongoing fee: The idea of an ongoing fee is to keep your car loan alive! It may refer specifically to maintenance or annual fee. It is paid throughout the loan term.
- Discharge fee: Also known as a closing fee, a discharge fee is charged at the end of the loan period, to cover costs of terminating the account.
- Late payment fee: If you fail to make a repayment on time you’ll be charged a late fee.
- Early payout: If you default, transfer, or pay off your loan before the end of the term you’ll be slapped with an early payout fee.
When your piggy bank isn’t full to the brim and you’re too old to be asking for money from your folks for a new car then it’s time to take out a personal loan for that extra bit of cash. An auto loan in Whittier California or anywhere in the area could be your savior when it comes to turning dreams into reality. It’s a means of accessing finances from a lender, then repaying back the money over a period of time. You can take out a car loan from a bank, credit union or peer to peer lender. There are many terms and phrases associated with car loans and not to mention fees and features. So before your head starts spinning it is good you know the facts about auto loans