Auto Loans 101
Auto loans are essential for most buyers to be able to buy a car. As any other loan, they consist on money being transferred from a person (the lender) to another (the borrower), in exchange of a “promise of payment” of the full amount, plus interest, over a predetermined period of time.
The auto loans market is a very important one and there is fierce competition between different lenders. They offer several discounts and benefits to gain a borrower’s trust and close the deal. There are many things that can lower your interest rate and how much money you spend for a car. Taking advantage of these little things can save you a lot of money in the long run.
This article is intended as a quick guide to help you get the best auto loan deal.
Types of Auto Loans
There are basically two types of car loans: direct loans and indirect loans.
A direct loan is when a borrower receives money from a bank or credit union directly. When you apply for a direct loan, you fill in the forms and gather the necessary documentation and the bank or credit union grants you the money.
A direct loan allows you to find the best deal you can get, since you are free to visit every creditor you want and ask for quotes, negotiate interest rates, and evaluate benefits.
In an indirect loan, the car dealer intercedes for you before the creditor. This is usually much quicker to get than a direct loan (in which you typically have to wait for some days until the loan gets approved). However, it is also more expensive, and you are more likely to pay additional fees.
Also, most car dealers have arrangements with a certain creditor (who pays them a commission on every borrower they refer), and many will even lend you the money themselves, acting like both a car dealer and a creditor.
Planning the Loan
Before start looking for a loan, there are some things you need to consider in order to avoid undesired surprises later.
For instance, many people apply for a loan for the full price of the car, but carelessly forget that there are many other costs involved in buying a car, especially if it’s a new one. Insurance and other costs should be considered when borrowing money. Remember that there are some things to be paid after buying your car before you can actually put it on the streets.
The most important part of the planning is, of course, deciding which car to buy. Try to choose a car model that is not too recent or too fancy, for those tend to be substantially more expensive. Besides, dealers usually have great discounts on cars that will be replaced with a newer model by the manufacturer, or that will be discontinued soon. This way you may get a very attractive deal on a good brand new car.
When looking for a loan for buying a used car, be sure to check several sources of information to get the actual market value of the car. You can get that information from many sites on the internet. AOL, Yahoo! and others have great resources for finding car prices and data. Dealers often ask a little more than the average market price, so keep that into consideration when applying for an auto loan.
If you have your own used car to sell, try to sell it before buying a new one. Generally speaking, selling a car will be better than trading it when buying another, especially if you manage to sell it to an individual and not to a used cars dealer. Trade-ins often consider your current car to be less valuable than it is. Having some cash from your sold car will reduce the amount you’ll need to borrow, thus lowering the amount to pay back to your creditor.
Loan Hunting
As with any other product, there are many different auto loan offers out there. Don’t hesitate to take the time to visit many banks and credit unions, and find out about everything they have to offer.
Once you have done this, take the better proposed deal and go visit the creditors again, and ask if they can offer you a lower interest rate or better conditions. After all, they are competing to do business with you, so it makes sense that they make an effort to give you a better deal than others.
If you plan to get financing from your dealer, be sure to look for any “hidden fees” that may be there. Often, dealers keep saying that certain costs “are included” in the total amount of the loan, making you think that those fees are not being charged to you. But remember: “included” is not the same as “free”.
Also, the typical interest rates you get from dealers are higher to the rates you may get from a bank or credit union, so be sure they are reasonable and fair.
As a golden rule, find out what your credit score is; many lenders take advantage of people who is not aware of their own credit scores and try to impose a higher interest rate, claiming that the borrower’s credit score is too low, which is not always true.
You should know your own credit score anyway, whether you are getting a loan or not. The U.S. law entitles you to receive a free annual credit report from each one of the three credit bureaus, so no one should be unaware of their credit situation.
If there’s a possibility that you cancel your auto loan debt early, then you should also look for the lowest early cancellation fees, as they may represent a big amount of money depending on how early you payoff your loan.
Always remember this simple fact: there are many creditors eager to do business with you. Don’t hesitate to walk away from a not-so-convenient loan, as the next creditor will surely make a better offer.
We hope this article helps you find a great auto loan deal. Keep these little tips at hand and you’ll be in the right track.