The Beginner’s Guide to Car Loans
A car is a major purchase. Whether you need a new car because your current one has broken down or you’re getting your first car, it can be a significant amount of money. The average cost of a new car is $34,876, a 4.7% increase from the previous year, according to data from AAA. Even used cars are more expensive than they were just a few years ago. If you don’t have the cash to purchase a car, you can look into auto financing. In this beginner’s guide, we’ll share what to know about car loans, auto loan rates, and repayment.
What are Car Loans?
Car loans are a type of lending product that allows consumers to take on auto financing to pay for a vehicle. So if you don’t have thousands of dollars available at your disposal to buy a car, a car loan can come in handy if you need some help.
You can get car loans from a bank or credit union, a private lender, or even a loan from a dealership. This type of loan is incredibly common. More than 100 million Americans have an auto loan, according to the Consumer Financial Protection Bureau (CFPB).
Getting a car loan is a good option if you don’t have enough money or if paying that much in full would threaten your financial security in other areas (for example, don’t use your emergency fund for a car purchase!).
INsite:
Getting a car loan is a good option if you don’t have enough money or if paying that much in full would threaten your financial security in other areas.
Getting a Car Loan vs. Lease vs. Paying in Full
If you need a car, there are different ways to go about it. You can look into car loans, leasing a vehicle, or paying in full.
Getting a car loan allows you to make monthly payments and you get to keep the asset you’re paying for — even though cars depreciate very quickly. This can help your cash flow if your monthly payments are within your budget. The downside is that you’ll pay interest on your car loan and currently auto loan rates are relatively high, up to 8% APR in some cases.
Leasing a car may have lower payments but you only get the car for a certain period of time. You don’t get to keep the asset. However, there are some other benefits to leasing, like most issues are under warranty for the term of your lease.
Paying in full is most often seen as the most cost-effective method because you don’t have to pay any interest or make monthly loan payments. On the other hand, it could take a big chunk of your savings or take a lot of time to build up. If you don’t have other savings readily available, then it can potentially be risky.
Don’t Wait: Get the funds you need to buy your car today.
What to Look for in Loan Options
Car loans can be an effective tool if you need a car ASAP but don’t have money upfront to pay for it. However, it’s still a type of loan that must be paid back. And if you don’t repay it or stay current on your payments? Your car could be repossessed. Before taking on auto financing, here’s what you need to know.
- APR: The Annual Percentage Rate or APR you get on a car loan will depend on multiple factors including your credit score, loan amount, and type of car. If you have poor credit, you’re more likely to have higher auto loan rates. The APR can also affect your monthly payment. If you have good credit, you could try to negotiate for a lower APR.
- Loan amount: Your total loan amount will depend on the type of car you’re buying, if you have a down payment, or if you have a trade-in that can help offset some of the costs.
- Loan term: If you’re looking into car loans, consider the loan term carefully. This refers to how long you have to repay the loan. For example, between 36 and 96 months. Going for a longer period can result in lower payments, but you’ll pay more in interest over the life of the loan. A shorter term can lower costs in the long run but lead to higher payments in the short term.
- Monthly payment: Calculate your potential monthly payment with different loan terms. You want something that fits within your budget and doesn’t leave you in a tough spot if other expenses come up. If the monthly payment is more than you can afford, it might be a good idea to wait, look for a less expensive car, or look for different loan terms.
Bank Financing vs Dealer Financing
It’s possible to get car loans through your own bank or financial institution or at some dealerships. You can also choose to get a personal loan to finance your vehicle purchase. Though it may be convenient to do everything at the car dealership, you might be missing out on potential savings.
It can pay to take a little more time and see if you can get a car loan from your bank or local credit union. They may be able to offer more competitive auto loan rates.
Bottom Line
If you’re ready to buy a car and looking at car loans, make sure to do your own research and compare auto loan rates. Look at any terms and conditions, additional fees, and understand how the extra payment will affect your budget. If you do things just right, you should be able to have a new car to drive while maintaining your financial health.
