Looking For A Car? Learn About Auto Loans First!

Tuesday, December 8th, 2020
man in suit offering a car key to the observer, with a car in th

When you decide it is time for a new car, or it’s your first time buying one, it can be exciting! But, there are some things you need to take care of before you sign for your new vehicle. This includes understanding your loan options.

The basics of an auto loan

Most people don’t purchase vehicles with cash. This is especially true when shopping at dealerships. Keep in mind that you will need to “shop” for loans before getting a vehicle. All auto loans have the same basic premise: you will get a loan for a certain amount and you will need to pay interest. This means you will pay the price of the vehicle plus the cost of the financing. Here are three terms that can help you understand how auto loans work.

  1. APR: This is the annual percentage rate that you will pay on your loan. This will vary from person to person.
  2. Loan term: This is the length of time you have to pay off the loan. A typical auto loan will last between 36 and 72 months.
  3. Loan amount: This is the amount you are being loaned and it will vary depending upon whether you have a trade-in or down payment.

You will need to budget

This should be your first step when you are ready to get a vehicle. Start by determining your monthly expenses and how much you have leftover for added purchases. Once you have found this amount, you can set a budget specifically for your future car payment. Here are some tips to help you do this.

  • Have money saved for a down payment. If you don’t, try to save as much as possible before you get your loan.
  • Speak with a financial advisor or someone at your financial institution. They will be able to help you figure out a good way to divide your finances.
  • Ask about an equation you can follow. An example is the 20-4-10 rule. This means you would spend no more than 20% of your income on a downpayment for a 4-year loan term while spending no more than 10% of your monthly income on related expenses.
  • Speaking of related costs, you will need to prepare to include these in your budget. You might need full coverage insurance, for example, and will need to budget for fuel and maintenance too.

After you budget, you will need to get a copy of your credit score

Thanks to modern technology, individuals can now check their credit scores online. If you choose to do this, keep in mind that not every website offers this for free. Also, the score you see may differ from what your loan officer sees. This is why it is best to decide where you will be getting a loan from and then speak with them about your credit score.

Types of auto loans to choose from

Once you have a basic understanding of how auto loans work, you can begin shopping for the right one for your needs. You have a couple of options to start your search. These are a dealership loan and a direct lender loan.

Dealership loans

Many people choose to get financing for their vehicle at the dealership where they are buying it. This is because the process can be taken care of in a single location and because the dealership can offer deals. Keep in mind that these deals can end up trapping you into paying more over a longer period of time. Here are the types of auto loans that dealerships offer.

  • Dealer-arranged financing: The dealerships that offer these have relationships with banks, but they do not provide the financing on their own. Think of the vehicle dealer as a go-between for you and the bank.
  • Captive finance companies: Major vehicle manufacturers offer financing throughout their own dealerships. Because they operate right out of the dealership, the companies can offer deals like limited-time 0% financing. The catch is that their deals are only made for people with the best credit scores.
  • Buy-here pay-here: Also known as in-house financing, this type is the least used auto loan. This is because the dealership always comes out ahead. The loans typically come with high-interest rates. Although they are offered to buyers that don’t have the best credit, the loans are secured with the vehicle. The dealership won’t suffer a loss if the buyer can’t pay their loan.

Loans from financial institutions

Most people go to a financial institution for a loan. Traditionally, you would need to figure out which car you like then go to the bank, or get pre-approval before going to the dealership. These days, especially with the pandemic, financial institutions are becoming more flexible.

Credit unions

These financial institutions are not-for-profit, which means they can offer better loan rates than banks. Credit unions are also known for their personalized service, like financial education. They will take the time to make sure you are fully prepared to get an auto loan. The catch is that most require you to be a member to get a loan. The good thing is that you can find a variety of credit unions in your area, from small institutions to large ones.

Online lenders

For some, getting an auto loan from an online lender is the best choice. There are options for those with great and poor credit. Some websites allow you to compare loans from different lenders too, which is a benefit when you speak with multiple lenders.

Tips for getting your next vehicle

Sometimes looking for a vehicle and finding the right loan can be stressful. It can help to take some of the stress off actually choosing a car. Here are some tips that can help you make a decision.

  1. Choose a new or used vehicle. You should know which you would like to buy before you start the process. This will narrow down your choices. Used vehicles will be cheaper all around, but new ones usually offer more amenities.
  2. Make a list. You can do this for both the vehicles you are choosing from and your loan options.
  3. Use websites to your advantage. Free sites like Kelly Blue Book can help you figure out what you are willing to spend on a vehicle.
  4. Know the risks. There are risks involved with buying vehicles. Used vehicles often come with maintenance issues, even if they are sold at a dealership. New vehicles will lose value the minute they are taken off the lot and lose even more after the first year.

Auto loans from Borger Federal Credit Union

If you are ready to get a vehicle loan, contact BFCU! We would love to help you get into your new ride. We offer pre-approval as well as e-signature services to make the process fast and simple! You can reach us by calling (806) 273-9506 to learn more about our Loans and becoming a Member.