Auto loans are essential when you want to buy or refinance a used or new car. While it might seem like the right time to buy a car, you can easily forget some steps through your auto loan application process. Here, we provide a comprehensive guide on what you should know about auto loans.
How Auto Loans Work
Auto loans are among the most common types of loans from financial institutions and often come as secured loans. This implies that you’ll need to present a real property as collateral to back up your loan. Furthermore, you’ll enjoy relatively lower interest rates compared to credit cards and personal loans.
Sometimes, the APRs (annual percentage rates) that include your interest rate and any extra fees can go as low as 3%. Even so, you’ll need to have excellent credit to enjoy these low APRs. On average, the auto loan rate stands at 4.3% for new vehicles and 8.6% for used ones.
Often, your auto loan terms will vary between 12 and 84 months. Still, you’ll need to be cautious about the 84-month auto loan because you might incur low monthly payments but high-interest rates.
Types of Auto Loans
Lenders provide an array of financing options at your disposal when you want to refinance or buy a car. It’s profound to understand the disparities between your auto loan options to understand what’s best for you. The following are the common types of auto loans that you can choose today.
Purchase Loans
Purchase loans apply when you want to buy a new or used car from a licensed dealer. Usually, you’ll get lower interest rates on new car loans compared to loans for used cars.
Also, you can apply for a private-party loan when you want to purchase a car from a private seller rather than a licensed dealer. Even so, lenders who offer these types of auto loans charge higher interest. This is because private-party loans get considered a little bit riskier than conventional purchase loans.
Lease Loans
A lease refers to your rental agreement for a vehicle. Besides, you’ll have the option to buy the car when the agreement expires. With lease loans, you can get a lease agreement or lease buyout.
The lease agreement allows you to have the car for a specified period, typically 24 to 36 months, with monthly down payments. You’ll have to return the car after the agreement period expires. At this time, you’ll have the option to buy the car using a lease-buyout loan if you wish to do so.
Refinancing Auto Loans
You can take a refinance loan as a new loan to pay off an existing auto loan. Often, you’ll get standard or cash-out refinance auto loans.
Your standard refinance loan can help pay your current one but with different loan terms, interest rates, or both. Sometimes, you can get a reduced refinance auto loan rate or decide to increase your monthly payments with a shorter term. That way, you reduce the amount you pay in interest.
Alternatively, you can enjoy reduced monthly car payments by prolonging your term. However, doing so will increase the amount you pay in total interest.
Cash-out refinancing will help remove equity from your vehicle in cash when refinancing. As a result, your LTV ratio increases and extends your loan term.
Where Can You Find Auto Loans?
Since these are common financial products, you can find your auto loans almost everywhere. Even so, you’ll find different characteristics and merits from varying lending options that appeal to different borrowers. Read on to find out more about where you can find auto loans.
Traditional Banks
These are some of the popular options you have for auto financing and generally offer competitive rates. Even so, banks may impose stricter lending requirements than other lending options.
Today, banks provide discounts to borrowers who have other accounts with the firm. These include checking, savings, and credit card accounts.
Credit Unions
Credit unions share a lot of similarities with banks. Even so, these institutions are member-owned and not-for-profit commercial, financial organizations.
Often, credit unions have more favorable lending requirements and might impose lower interest rates than banks. While most unions will require your membership, most will let you join for a small donation to the institution or a charity.
Car Dealerships
In most cases, dealerships will offer in-house finance options with lower interest rates than some credit unions and banks. Often, you’ll get larger, branded car dealerships offering even 0% APR deals on new cars to buyers with good credit.
Independent dealerships, also known as buy-here, pay-here, can offer financing options to individuals with bad credit. Even so, you should expect to get very high-interest rates. Furthermore, independent car dealerships will install tracking devices on cars they finance and will charge you for this service.
Online Lenders
Today, you can practically get everything online, including auto loans. You may find some of these online lenders acting as direct lenders supported by banks. Also, others will serve as lending brokers to help you find the best financing options for your car.
The other category involves loan marketplaces where you can post your needs and information online. After doing so, you wait for prospective lenders to send offers your way. You can easily compare your available loan offers with online lending and choose the best.
Besides, you’ll enjoy a fast and easy application process when applying for your auto loans online. So, your application can get approved within minutes, if not instantly.
Auto Loan Fees
Your auto loans may have extra costs that get included in the APR. Still, not every lender will charge these fees or similar amounts. The most common types of auto loan fees include application and origination fees.
Application fees are the flat fees imposed when submitting your auto loan application. Remember, not every lender will charge you an application fee.
Also, some lenders will charge you an origination fee for processing your auto loan. Depending on your lender, you’ll either pay this amount at a flat rate or a percentage of your auto loan amount.
It’s essential to weigh your lending options before choosing the right one to finance your car. It’d help to seek help from an auto loan expert to enable you to make an informed decision.