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The Essential Guide to Car Loans: Everything You Need to Know

May 21, 2021 by Space Coast Credit Union

When considering buying a new or used car, most of us take advantage of some form of auto financing. A car loan is a convenient way to get the car you need, but there are many different avenues to get you to the dotted line.
In this guide, we’ll cover the ins and outs of auto loans and refinancing, so you have everything you need to get the best car loan for you.


Auto Loans 101

Car loans fall under the category of personal loans. With personal loans, the lender makes an agreement with you to finance your car purchase under a specific set of terms and conditions. Your car loan provides you with the funds to buy your vehicle and pay for your purchase with regular payments over a period of time.
A few of the key terms you’ll see when it comes to car loans include the following:


Terms & Conditions

Terms and conditions for an auto loan spell out exactly what amount is being borrowed, how long the borrower will be making payments (term length), the interest rate, down payment amount, insurance requirements, instructions for paying off the loan, and other pertinent information.
While it can be easy to gloss over these in the excitement of buying your new car, you should always read the loan’s terms and conditions to make sure you understand everything you’re agreeing to under the car loan agreement. If you ever have any doubts, just ask – our team members are happy to walk you through all the details and options available to you.


Interest Rates vs. APRs

An interest rate is how much your lender is charging you for borrowing money to pay for the car. Interest rates are also be listed as annual percentage rates (APR) which can include additional fees to compute the overall interest rate being paid. Because they encompass more information, APRs tend to be a more accurate representation of what you’ll actually end up paying over the life of the loan.


Down Payment

A down payment is a set amount of money paid up front towards the purchase of the new or used vehicle. Sometimes trading in another vehicle can count as down payment towards the new vehicle you’re buying. A down payment will often be expressed as a percentage of the total purchase price.
For example, a 20% down payment listed for a $20,000 vehicle would mean paying $4,000 at the time of purchase and financing the remaining $16,000.


Secured and Unsecured Loans

Even though car loans are classified as personal loans, there are some differences between the two. For one, personal loans are usually unsecured, which means it does not have collateral tied to it. Collateral is something like property or assets that are promised to a lender to secure the loan. In the event that the borrower defaults on the loan, the lender has a right to take possession of the collateral.
Auto loans are secured loans because the vehicle being purchased is usually used as collateral in the agreement. Remember that with a secured loan, a default means the lender can take the collateral, which could mean a repossession of the vehicle.


Mastering the Car Loan Process

Getting your car loan involves a lot of numbers and paperwork, but it’s easy to take a few proactive steps before you ever look at vehicles that can save you money in the long run.
1. Check Your Credit Score: The very first thing you should do when you’re in the market for a new vehicle is to check your credit score. With any kind of auto financing, your credit score is a major factor in the terms you’ll receive on your new loan. When you have less than stellar credit, you can take steps ahead of time to help improve your score. Work to pay down high-interest debt such as with credit cards and dispute any inaccuracies you see on your report with the credit bureaus.
Notching up your credit score can take a little time, so start the process early if you can. Since most auto loans are made based on creditworthiness, improving your credit score is your path to a better interest rate, which will save you money over the life of your auto loan. As an added bonus, you can track your FICO credit score for free using the SCCU Online Banking or Mobile app.
2. Know Your Auto Financing Options: When it comes to car loans, you have many different options. Knowing what options are available to you ahead of time gives you more negotiating power in finding the perfect car loan to meet your needs. Term length, interest rates, and other important aspects of the loan can vary considerably from one lender to the next.
Often, credit unions are able to offer a lower interest rate on car loans and other financing simply because of how they’re structured, so be sure to do your homework before heading to the dealer.
3. Try to Keep a Low Term: Your car loan term is how many months your loan will take to pay off. Stretching a term to its maximum may sound like a great idea for getting a lower monthly payment, but you’ll also end up paying more in interest over the life of the loan than if you’d financed the same amount for a shorter term. Knowing how much you can reasonably afford each month is going to take a little work and starts with budgeting. Our online calculators and budgeting worksheet help make it easy to see what you can reasonably afford. With this information, you’ll be ready to find a car loan that best fits your financial situation.
4. Put as Much Down as You Can: A lot of dealerships offer deals like “no money down” but while spending less today can be tempting, it can end up costing you down the road. Putting down a larger down payment means you’ll end up financing less, which translates to less interest being paid out over the life of the loan. Putting down 20% is a good starting point and can translate into significant savings while you finance the remainder. If you don’t have 20% to put down on a new car, consider waiting and saving up until you get there—your future finances will thank you!
5. Use Cash: There can be a lot of extra fees added to the final car price that aren’t included in the sticker price. Tax and title fees, dealer fees, warranties, and other additional costs can really add up. If you’re able, use cash to fund these additional fees rather than rolling them into your new auto loan. When you choose to finance all these fees, you can find you owe more than the car’s worth before you even drive off the lot, a financial situation known as “being underwater” or “upside down,” neither of which is desirable.
If you do owe more than the vehicle is worth and the car is stolen or totaled, your insurance company might not provide enough to get a new vehicle. This is a situation where GAP insurance is vital, a topic we’ll touch on in greater detail later. 
Coming prepared with everything you need to lock down with your auto loan before you head to the dealership gives you the ability to think long term about this important purchasing decision. By implementing just a few easy steps like the ones outlined above, you’ll have the best setup possible for your new ride.


Negotiating to Get Better Car Loan Terms

You may have heard the phrase “everything’s negotiable” and while that might not hold true for every event in life, it can for car loans. Car loans are handled by loan officers who look over all of the facts of the transaction, including the borrower’s financial situation, the asset being purchased, and if the deal makes financial sense for the banking institution. When you’ve had a chance to research different loan options, ask for better terms from the lenders.
Some lenders are more willing to work with you than others but it never hurts to ask and you may be able to score some major savings. Generally, credit unions are usually able to offer better interest rates and terms than large, traditional banks, so use this to your advantage as you shop for the best loan for your situation.


Getting Pre-Approved for an Auto Loan

The first thing to understand about a pre-approval is that it’s not signing on the dotted line for your auto loan. Pre-approval simply states how much the financial institution is willing to loan to you and the interest rate you can expect. Many pre-approvals come with a set time where the offer is valid, giving auto shoppers a window for checking out different vehicles. A pre-approval is a smart choice because it allows you to have everything you need to know about your loan hammered out ahead of time, before you get to the dealership.
Buying a new car can be very exciting and sitting in the financing manager’s office with what seems like an attractive offer isn’t the best time to try to evaluate if their loan package is the best available. By getting your pre-approval ahead of time, you’ll also know how much you’ll have to spend before you shop, so you aren’t disappointed after discovering what financial institutions are willing to loan you. You can effectively use this limit during negotiations to try to get the best deal possible on a new vehicle.
Getting pre-approved for an SCCU auto loan comes with the advantage of our low rates and a fast approval process for both new and used vehicles. We also don’t charge application fees, don’t have prepayment penalties, and have flexible terms with our no payments for up to 120 days offer11. With all of this information in hand, you’ll be walking into a dealership with the same clout as an all-cash buyer—giving you negotiating power.


Auto Financing From the Dealership

Now that we’ve gotten this far, you may be thinking you need to avoid dealer financing at all costs. While a lot of in-house financing options at dealerships aren’t able to offer the same low rates and great terms as credit unions, there are opportunities to find the perfect car and get financing all in one smooth transaction at the dealer.
We’ve partnered with participating dealerships to offer SCCU auto loans straight from the dealer. Participating dealerships are Watchdog approved, which means they’ve demonstrated a commitment to helping consumers get a great vehicle, with great financing terms. These dealerships can take your application and submit it straight to us for a fast and easy auto loan process. Request a dealer near you for more information on this exciting program.


Getting the Best Rate for an Auto Loan

Comparing your options for auto loans definitely needs to include a rate comparison as this is one of the most impactful parts of how much you’ll end up paying over the life of the loan. Even just a few percentage points can mean thousands of dollars saved (or spent) on an otherwise similar car loan.
So who has the best rates on auto loans? Credit unions are able to offer some of the best rates available because of how these we financial institutions operate. By passing on the savings to members, new car loans can come with attractive rates and terms that other lending institutions and car dealerships won’t be able to match.
But the number one thing to scoring the best rate on your new car loan is to compare your loan options. Though your first loan application can temporarily ding your credit score, you typically have a 14-day window to rate shop with additional lenders without additional hits to your credit. And with no fees to get pre-approved for a car loan, you can see exactly how much you can borrow and the payment your new rate gets you. Compare how much you’ll pay with other lender options to see who has the best overall package for your individual financial situation. Comparison shopping is by far the best way to get a great rate on a new auto loan.


How to Refinance an Auto Loan

So maybe you didn’t check out your favorite credit union’s ultimate guide to car loans ahead of time and inadvertently got stuck in an auto loan with less-than-favorable terms. What options do you have? Not to worry; SCCU has you covered. We make it easy to get out from under an auto loan from a different lender by refinancing your loan.
Refinancing an auto loan for a lower interest rate means you can save over the life of your car loan. With SCCU, you’ll enjoy a full list of additional benefits that comes with our auto loans including no application fees, flexible terms, our no payments for up to 120 days offer11, a simple electronic closing, and SCCU membership with free Online and Mobile Banking.


How Auto Refinancing Works

Refinancing your auto loan means you’ll be completely replacing your current loan with a brand-new car loan. The new loan serves to pay off all the debt that’s owed on your former loan so that you’re left with a single car loan. Your new car loan has its own interest rate, terms and conditions, and all the other details typically included in a car loan.
Let’s look at a refinance auto loan example:
  • You have a 60-month, $40,000 car loan at a 5% interest rate that you’ve paid down to $20,000 over the last few years.
  • You find that SCCU can offer you a refinanced car loan for the remaining $20,000 at a lower rate, such as 3%. You also discover you can stretch out your term a few extra months. With the lower interest and more time to pay, you’ll decrease how much you have to pay each month. Or you decide for a shorter term for the same monthly payment but less total cost over the life of your loan.

Is Auto Refinancing Always the Best Choice?

Even though we love to help members save money by refinancing their auto loans, sometimes refinancing isn’t the best financial move for every borrower. Lowering monthly payments, taking advantage of better interest rates, and changing financial situations can all be reasons that refinancing makes sense at the moment, but things can change.
At SCCU, we want our members to be in the best position when it comes to their financial wellness, so we work with you to help you understand what a new loan will look like and mean for your financial situation. Take the time to run the numbers through our auto refinance calculator to help determine if this is the best course for you to take. With no application fees on auto refinancing, it never hurts to explore your options to see how this will affect your individual financial situation.
Still have questions? Request a Loan Consultation and we’ll help guide you through the entire auto loan refinancing process.


Insurance and New Car Loans

Insurance can seem like an afterthought when it comes to car loans, but this important protection is often critical to getting the car of your dreams. Almost every state in the U.S. has a requirement for car insurance in order to drive a vehicle. In Florida, for example, you’ll need proof of Personal Injury Protection and Property Damage Liability automobile insurance to register your vehicle.
Your financial institution will also, almost always, require insurance coverage in order to secure an auto loan. SCCU requires collision and comprehensive coverage for all vehicle loans.


Do I Need GAP Coverage with a New Car Loan?

Guaranteed Asset Protection (GAP) coverage works like this – if the vehicle you just got your new auto loan on is stolen or totaled, you could end up owing more money than your insurance company pays out. That would leave you having to cover the difference out-of-pocket. GAP covers the difference for you..
While it’s not always a requirement, GAP insurance has been known to save the day in different situations. Times when GAP insurance make the most sense include:
No money down: When you don’t put a lot of money down for a new car loan and have a long term. With all the taxes and fees rolled in, you may owe more than the actual value of your vehicle, at least for the first couple of years you own it.
Luxury vehicles: You purchased a vehicle that depreciates quickly such as a luxury vehicle or certain types of SUVs. As above, this can mean that you owe more than the value of the vehicle.
Type of Insurance: If you get in a wreck with a new car, your insurance company typically pays claims based on actual cash value rather than full-replacement value. This means rather than getting a brand new car to replace the one that was wrecked, you’ll get the value of the car at the time of the claim incident, regardless of how much you owe.
GAP insurance can be a lifesaver in the right situation. To learn more about this offering, check out GAP coverage through SCCU.


Apply for an SCCU Auto Loan in Just Minutes

Fast approval decisions, no application fees, low rates for new and used vehicles, and flexible terms— are just some of the many benefits that come with working with SCCU for your new car loan.
Whether it's getting pre-approved for a new auto loan to purchase a vehicle, an auto loan refinance, or securing auto financing at the dealership, SCCU has a complete suite of options available to help you find the best financing options available. If you have any questions along the way, you can always sit down with one of our helpful express service associates. Schedule a free loan consultation here.
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