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
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.
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.
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.