Auto Loans

Getting the Best Financing Plan For Your New or Used Car

Most people get excited about getting a new car, which is totally understandable. However, many forget that they are not only shopping for a car that can reliably get them to and from work, but also for conventional financing.

Just like cars, auto loans come in many different forms,  depending on the lender, the type of vehicle you want to buy and your needs. Shopping for the right auto loan can be overwhelming, especially if it is your first time. Unless you have enough cash lying around to finance a car in full, you will probably need an auto loan to buy a new or a used car. The terms and conditions of auto loans vary from one lender to the other. Therefore, it is essential to understand how an auto loan works and know the different types.

Types of Auto Loans

Many people buy new or used cars using auto loans. There are various types of auto loans. The terms of an auto loan depend upon certain factors, such as your credit history and income.

SECURED LOAN

What is it?

A secured auto loan is guaranteed by a lien on the fundamental asset, in this instance, the vehicle. The lien lowers the risk of defaulting for the lender. However, some secured auto loans might put a lien on another car or a house that is owned by the debtor. Make sure you know which asset secures your loan because if you fall behind on the payments, the lender is legally allowed to reclaim or seize it. Secured auto loans have lower interest rates since they are backed by collateral.

Who gets it?

If you are looking for a loan with the lowest interest rate, a secured auto loan is the best option. Many borrowers who apply for a secured auto loan can’t qualify for an unsecured loan and need money right away. A secured auto loan is the best option for you if you can afford to make the monthly payments in a timely way.

SIMPLE INTEREST

What is it?

A simple interest auto loan is calculated on the outstanding principal at the time the payment is complete. The outstanding balance usually accumulates interest periodically, typically daily. Borrowers must make monthly payments; however, they can also fasten the payoff and limit the interest costs by making large or multiple monthly payments. Early payment allows debtors to settle simple interest loans quicker, whereas paying less in interest may lengthen the loan’s life.

Who gets it?

A simple interest loan is suitable for you if you are expecting a rise in your cash flow, if you are almost done paying your loans, or if you are getting a raise at work. You can opt for a simple interest loan if you have ample personal savings. A simple interest loan can help you reduce your overall borrowing cost.

UNSECURED LOAN

What is it?

Unsecured loans are not backed by collateral. Lenders cannot repossess any asset if payments are missed. Instead, they have to go after the negligent borrower via legitimate means. Most of the unsecured loans have higher interest rates since the lender is more dependent on the borrower’s promise to pay off the loan. Due to the greater risk, unsecured loans are uncommon and have higher rates. The rates depend on your credit history and other factors.

Who gets it?

A good credit score increases the chance of you qualifying for an unsecured loan. Good credit allows you to get lower interest and higher loan amount options. The best part of an unsecured auto loan is your car is never at risk of being repossessed, and the application process is easier if you have excellent credit.

PRE-COMPUTED INTEREST

What is it?

Compared to the simple interest loan, pre-computed interest loans are not as flexible. With precomputed interest loans, borrowers are required to stick to a planned payment on a predetermined basis with every reimbursement allocated an exact share of the loan’s principal as well as interest. Pre-computed interest auto loans are calculated by taking all the interest that will be due over the term of a loan and adding it to the principal amount of the loan.

Who gets it?

According to various financial analysts, precomputed interest loans are unfair to consumers, because they penalize anyone who pays off the loan early. This type of loan is not recommended and is outlawed in some states since it represents a payment penalty. Lenders can accept your loan application for a precomputed interest loan if you have less than perfect credit. However, be very careful and shop around while comparing offers from car dealerships. Make sure you understand how the precomputed interest loan works and how they can impact your future financial standing.

Special Loans

TITLE LOAN

What is it?

Car title loans give you the option to get a swift approval on a short-term loan; however, they are usually costly. To get a title loan, you will have to use your vehicle as security by giving out the title to the creditor until the loan is fully settled. However, you are allowed to keep your car. If you default on the payments, your financier can repossess the vehicle and sell it to repay your outstanding debt. The amount you can borrow is based on the value of your car or the equity you have in the vehicle.

Who gets it?

Title loans are ideal when you require a short term loan. The downside with this type of loan is that if you are unable to make the full loan payment by the end of the loan term, the lender may offer to renew or even roll over the loan into a new loan adding more fees and interest to the amount you already have in debt. You can get an auto title loan if you have proof of income, car registration, and a lien-free car title in your name.

LEASE BUYOUT LOAN

What is it?

When you lease a car; you can extend your lease, turn the vehicle in or buy it. Buying a leased car is called a buyout. A lease buyout loan is a loan obtained to buy your leased car. Unless you have enough money to buy a leased car, you will need a lease buyout loan from a financing company. When shopping around for a buyout loan, look for the best interest rates and terms, because not all lenders offer a lease buyout loan. If you have decided to buy your leased car, make sure to let your leasing company know of your plans before.

Who gets it?

The requirements of a lease buyout loan are similar to used car loans. You must have a good payment history on your current lease contract; you will also need an excellent credit score. In some cases, a down payment might be required if the outstanding price of your vehicle is significantly higher than the market value. If you think of buying a car that has a high residual value, consider purchasing a pre-owned vehicle equipped liked your leased car.

Where to Shop for Auto Loans

If you have already decided on buying a car, the question you might now be asking yourself is which financing option is best for you. There are various ways of financing your used or new car; however, there are three primary ways, including dealer financing, financing through a bank, and financing through a credit union.

The car dealership

It is possible to get good deals when you get financing through a car dealership. However, you need to be very careful since the car dealerships make commissions off the loans sold to the customers.

Benefit

The financing experience can be more convenient when you finance a car with the car dealer because you will save time by doing everything at the same place. For instance, there is no need to travel to numerous locations to sign your paperwork; car dealers are one-stop-shops that excellently arrange the funding for you.

Drawback

Low-interest rates are only available for endorsed makes and models, and it can be hard to qualify for 0% rate deals, which might indicate a higher purchase price for the car.

Banks

Choosing a suitable lender is part of getting a good car. Banks are the best-recognized lending parties you will find. They are less likely to pull some tricks pulled by other cheap money shops.

Benefit

Apart from car loans, banks can also offer other types of loans and allow you to get pre-approved for a car loan.

Drawback

Many banks have less favorable rates; however, you can get an auto loan that may be accompanied by commonly higher and uncompetitive interest rates.

Credit unions

A credit union is also a great choice if you are thinking about buying a new or used car. There are more than 5,600 federally protected credit unions in the United States, with over 110 million members.

Benefit

Credit unions are not-for-profit organizations that invest profits into their members. You can get an auto loan with a relatively low-interest rate than the regular rates offered by banks and car dealerships. They are also willing to work with a member who has less than perfect credit.

Drawback

You have to meet some criteria to be a member of a credit union. Since credit unions offer car loans to members-only, you will need an excellent credit to join; however, the requirements might vary from one credit union to the other.

How Car Loans Work

Steps to Getting a Car Loan

The process of getting a car loan can be devastating. Here are some few steps that can make the process easier for you.

1. Decide if you want a new or used car

Look into vehicles that will meet your needs and your budget. Consider your driving habits when thinking of the model and features you want. Car financing is always agreed based on the value of the car. Lenders have various ways of determining the value of the vehicle; they consider the vehicle’s condition as well as its history together with the market valuation for an exact car with the same model, make and year.

The interest rates and APRs usually are lower for new cars than a used car. On the other hand, financing a used car can be easier because of the lower average price and smaller loan amounts and shorter loan terms.

2. Figure out how much you can spend on a car

The best way to approach an auto loan is by concentrating on the total cost of the vehicle, including the down payment, the total number of fees and the interest you will pay. Figure out how much you can afford to spend every month on a car payment without damaging your budget.

Auto loans usually come in 3-6 year terms; the longer the loan term, the lower the monthly payment. However, a longer loan term means that you will pay more in interest owing more than what the vehicle is worth. You should add the insurance and the maintenance cost in the monthly payments, too. Make sure you are prepared for the total cost of the choice of vehicle you want.

3. Check your credit report

Your credit score is going to have a huge impact on the type of loan you’re approved for, so check your credit report to see where you stand.

Some errors in your credit report can affect your access to the best loan terms. A better credit report gives you a higher chance of getting approved for an auto loan with better terms.

ck your credit report before completing the application. The better your credit score, the better your loan terms.

- Getting a Credit Report

According to the Federal Trade Commission, you are entitled to a free copy of your credit report every year from each of the three major nationwide reporting agencies. You can order online from the only authorized website AnnualCreditReport.com.

Apart from AnnualCreditReport.com, there are other free credit report sites which include

Be very cautious of companies that give you a free credit report. Only AnnualCreditReport.com is authorized to fill orders for your annual credit reports. Some of these free credit report scam sites come with certain conditions; you may have to pay a fee after an initial trial service. Avoid credit reporting agencies that ask you to provide your personal information like credit card or bank account number.

4. Complete a loan application

Loan application takes a few minutes to fill. It will be easier if you have all the needed information before you get started. Including;

  • Social Security number
  • Financial information like your credit card names and balances
  • Proof of income
  • Proof of residence
  • Personal details like name address and phone number
  • Credit rating
  • Vehicle information
  • Trade-in documentation; current vehicle registration
5. Get pre-approved

Make sure you are pre-approved before you enter into a car dealership. This will give you leverage when negotiating. You can still be pre-approved for a loan with bad credit; however, the interest rate will be higher.  Preapproval simply means that a lender has reviewed your credit report as well as other information to determine the loan amount and interest rate you are likely to get.

6. Find a co-signer, if needed

If you have no credit history, you could get a co-signer who has good credit to help you qualify for a better car loan. It is important to note that your co-signer will be similarly accountable for paying off the loan if you default, so pay your loan on time to avoid ruining both your co-signers and your own credit history.

7. Choose a vehicle

Once you have been pre-approved for a loan, it is time to shop for a vehicle. Choose a car that is suitable for your lifestyle. Make sure to check the loan offers for excluded brands, dealership requirements, and time restrictions.

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