By learning about the things to look for when reviewing a contract, you can make an informed decision about your investment and finances. There are several types of auto loans, including those given to you by a dealership or a private lender, as well as secured loans, unsecured loans, and more. Find out more about the intricacies of auto loans below.
What are auto loans?Most Americans cannot afford to buy a car outright. Auto loans provide the opportunity to do so by lending funds for the purchase of a vehicle. In return for this loan, borrowers pay back lenders the amount that they borrowed with interest. Monthly payments are made for a set period with a portion of the payment going to the principal balance and the remaining going towards interest.
Things to Look for When Reviewing Auto Loan DetailsIf you are considering auto loans, it is important to know what to look for when reviewing a contract before you sign. These are the details that you should be hashing out with lenders and dealerships before finalizing the purchase of a vehicle.
The Loan AmountThe loan amount is the total amount you are going to borrow from a lender. This amount will include the purchase price of the car and any other fees accrued from the purchase. Other common fees include registration, taxes, and dealership-specific fees. These fees may include underwriting charges, gap insurance, and other costs as well.
The Term LengthTerm length refers to the amount of time you will pay the loan. Common lengths include 24, 36, and 48 months. Generally, terms will vary by six-month or 12-month increments.
Generally, the shorter your term length, the higher your monthly payments will be. However, the faster you pay off a loan, the less you will pay in interest over the life of the loan.
The Rate of InterestYour rate of interest, also called annual percentage rate (APR), is the amount you must pay to your lender alongside payments towards your principal balance. The lower your interest rate, the better. Having a low interest will require you to pay less over the life of your loan as opposed to a high-interest rate.
The Best Types of Auto LoansTo find the best auto loans, it is essential to understand the different types of loans you may come across.
Secured Auto Loans
Secured auto loans are very common. Most loans for vehicles, regardless of where you obtain them, will be a secured loan. A secured loan is a loan that uses collateral to ensure the repayment of the loan. In the case of an auto loan, that collateral is usually the vehicle. If you do not repay your loan, your lender can repossess your car.
Unsecured Auto Loans
Unsecured loans are less common. They do not require any form of collateral. However, these loans often have higher interest rates and can be more challenging to qualify for.
Private Direct Financing Options
With direct financing, you can shop around for auto loans before you visit a dealership. Pre-approvals can lessen the amount of time you spend at a dealership and help you get the best loan terms possible. You can shop for rates online, through your bank, or any other type of auto loan lender.
If you do not shop for loans ahead of time, you can qualify for financing through a dealership. Some dealerships offer their own financing options, while others have pre-negotiated rates with a variety of local lenders.
The Impact Your Credit History and Score Have on Auto LoansYour credit history and score will impact your interest rate and whether or not you will even receive a loan. If you have a low credit score, you may only qualify for a high interest rate, and having a higher interest rate will increase the amount you will pay for a loan. Therefore, it is essential to try to build up your credit before a large purchase.
You can improve your odds of getting a better loan by shopping around before visiting a dealership. Additionally, you may be able to obtain a better interest rate if you have a cosigner or if you pay a large down payment.