You can get an auto loan much easier than secure a mortgage, as there’s more flexibility to the lending criteria. The best starting point is to think about what you can afford. You don’t want to break the bank with a car loan that will completely bust your budget.
With that in mind, we at Market Pro Secure® came up with this guide to auto loans to make sure you fully understand what to expect from the auto loan process. Here you’ll find details like what you need to qualify for a loan, where you can get one, other important information, pro tips, and auto loans FAQ.
The information we provide here can be extremely useful, especially if you’re completely new to the car buying process. It’s good to know how lenders size you up, what determines your qualification for a loan, what the interest rate is, and more.
Key Factors in Determining Your Auto Loan
The first thing a lender will consider is your credit score. This is one of the most important factors that will decide whether you’ll get an auto loan. You have much better chances of getting approved if your credit score is really great, but more importantly, an excellent credit score reduces the interest rate.
The other most important factor is the debt load. Lenders always check your debt load to see how much your budget is burdened.
If your debt load is just too big, that means that paying back your loan might be problematic. Lenders use DTI or debt-to-income ratio, so see how much of your monthly income goes to paying your debts.
If you can spare some additional money to pay upfront, this could significantly increase your chances of getting approved for an auto loan. That money is what is considered as the down payment, and it reduces your auto loan principal – the amount you have to take as a loan.
The more you can spare to pay upfront, the better. When it comes to auto loans, it’s essential that you don’t wind up owing more than your vehicle is worth. Take this into consideration, as the fact remains that the car depreciation rate goes up to 25% in the first year of ownership.
So, aim to put down the purchase price for at least 20% if you’re buying a new car, or 10% if it’s a used car. A bigger down payment works to your advantage in case your credit score is bad. Use it to get a better interest rate.
The Loan Terms
The loan term refers to the period of time you need to pay back your loan. The most common loan term is from 3 to 6 years, but there are longer and shorter terms as well, depending on the lender. The longer the term, the lower the monthly payment, but the interest rate is higher. That’s the thing with auto loans – the longer it takes to pay back the loan, the higher the cost.
New Car Vs. Used Car
If you decide to lend a loan for a used car, that could lower your loan principal. Used cars are usually much cheaper, but buying a new car ensures a much better interest rate. The reasons for this are many – 3 main are listed below:
- Used cars are much harder to resell.
- Lenders prefer to lend for new cars, as they offer more interest.
- Most people who buy used cars have lower credit scores that include extra risk. That’s why lenders charge higher interests to balance the risk.
What Are Best Places to Get Auto Loan?
Getting an auto loan isn’t anything complicated, as there are so many major lenders that offer great terms. The reason for this is simple – if you don’t pay, they take your car. What really matters when it comes to auto loans is that you should consider all the options available before you do anything.
Car Manufacturers and Dealers
If a dealer has the car of your dreams, you can easily arrange the financing and get what you want. Still, all this convenience doesn’t come without a price.
Most dealers work with a network of auto lenders to provide that financing, which means that you have to pay for their fee on top of the interest rate. Instead of doing that, you can simply go directly to the lenders.
Most car manufacturers have a lending arm of their own, where you can get a loan. The most typical car manufacturer loan is going through a dealer that arranges the loan, but there’s also an option to apply directly online. If you qualify, there are excellent special promotions that offer you a chance to save a lot of money.
Credit Unions or Banks
Both credit unions and banks offer pre-approved car loans, and most people find getting pre-approved auto loans to be more convenient than going to the dealer’s lot.
Even more so if it’s a bank where they have their personal and professional bank accounts – it’s easier to get the procedure done since the bank already has all the necessary information.
However, don’t exclude credit unions as an alternative. They offer lower interest rates due to the lower overhead and are more flexible when it comes to lending criteria. This will matter a lot, especially if your credit score isn’t all that great.
Online Auto Loan Lenders
Online lenders are the most convenient option, as you can buy a car from the comfort of your home. That aside, online lenders have one advantage over brick-and-mortar banks – they don’t suffer the same overhead costs as banks do.
This allows online lenders to offer lower and more affordable interest rates. However, there’s a catch here worth mentioning – before you do anything over the internet, you need to make sure your online lender is legit, safe, and secure before you give your personal information.
3 Reasons to Get Pre-Approved for Auto Loan
While getting a loan from the dealer is a good way to go, it’s even better to get pre-approved by a lender before you go shopping. There are several reasons for this:
- No need for dealer financing – even though you don’t need financing, the dealer will want to chip in, and they are far likely to offer better rates and terms to retain your loan for the sake of the profit.
- You won’t break the bank – it’s a common practice for dealers to work the number to fit your budget and make you afford a pricey car. They do this by allowing you to determine the monthly amount you can pay. The problem is that this prolongs your loan term, which includes a higher interest rate. You can avoid this by getting terms that actually fit your budget.
- Pre-approved equals no stress – if you hate negotiating, buying a car might just turn out to be quite uncomfortable and tedious. Fortunately, you can ease this stress by getting pre-approved, as this allows you to shift your focus on getting the best prices rather than wasting your time and effort on the loan.
How to Secure a Lower Interest Rate for Auto Loan
Securing a lower interest rate depends on a number of factors such as:
- Buying a new car
- Going with a higher down payment
- Choosing a shorter loan term
- Picking a lower DTI ratio
- Having a better credit score
Always check the interest rates before you start buying so that you’ll know what to expect.
What is 0% Financing?
0% financing isn’t a myth, it’s real, but you need to qualify for it. Typically, it’s the car’s manufacturer that offers a 0% interest, and it’s a fully legit deal. However, it’s not that easy to get this kind of a sweet deal.
- You might not pass the qualification – only those with the best credit can qualify for a 0% interest rate, and the financial arm of the car manufacturer does the evaluation. Even if you don’t get a 0% rate, shoot for the most competitive rate you can get.
- 0% financing is usually short-term – it’s common practice for some car manufacturers to offer shorter loan terms that include 0% financing promotions. It’s usually for 36 months. While it seems that you’ll pay less over time, your monthly payments will be higher, which could spread your budget thin.
- No discounts – most dealers won’t agree on giving you a discount because they’re not making any money when the interest rate is 0%. That means that they’ll try to cross-sell and upsell to make up for the loss.
- You’ll have to choose between 0% financing and other promotions – dealers always make customers choose between 0% and promotions that reduce either the car price or the interest rate. This is where you’ll have to bring your calculator with you to determine which deal is better for you.
5 Professional Tips on Auto Loan
Before you get an auto loan, you need to know that there’s much more to it than just the car price. There’s always more than meets the eye, and these tips will help you understand all things associated with auto loans.
1. Sales tax – getting an auto loan is one thing, but paying a standard sales tax on your new car is an entirely different expense you’ll have to consider.
2. Registration and title – you can’t make your new ride legal without the registration and title, and these costs vary from state to state.
3. Dealership fees – when getting an auto loan, there’s quite a bit of paperwork, and dealers usually charge additional fees to prepare the papers and the car for sale, as well as shipping your new vehicle to the lot. The good news is that these fees are negotiable.
4. Insurance – most dealerships don’t close deals on auto loans if you don’t have insurance, and this is an additional expense to worry about.
5. Extras – every dealer is always looking to sell more, and they’ll do their best to sell you some extras, which include extended warranties, paint protection, and rust-proofing.
Auto Loan FAQs
Yes, there is. The interest rate is simply a cost of borrowing the annual principal, while the annual percentage rate (APR) includes all other costs and fees associated with your auto loan.
Yes, there is. If you fall behind on an auto loan payment, there will be additional fees. That’s if you’re a month behind. If it’s longer, you’ll be reported to the credit bureau, which will look bad in your credit report.
If you’re a few months behind, you risk having a collection agency take your vehicle. The best thing to do is to make your payments regularly, and in case you think you’ll fall behind, talk to your lender to determine the best course of action.
Lenders often sell the loans they can’t charge to collection agencies that repossess the vehicle in question to make up for the loss. To avoid this risk, make sure you pay your dues regularly. In case there are any problems, talk to your lenders to work things out.
If your credit score is great, you’re in the best interest rate race. That aside, take your time and shop around. Auto loans are competitive, and chances are that you will find what you’re looking for at lenders that offer better terms to beat their competition. As long as you can meet their underwriting standards, you’ll be able to qualify for the best interest rate.
While there isn’t a simple answer to this question, let us begin by saying yes, it is. The only catch is that you’ll have to go with a much higher interest rate as a measure of precaution for dealers and lenders. The more you shop around, the more options you’ll have.