The average person needs a car but doesn’t have a large sum of cash to pay for a car upfront. That’s where auto loans come in. It’s common for people to rely on auto loans to finance the purchase of a new car, but is taking out an auto loan the right choice? And what kind of car loan should you get?
If you don’t know how to finance a car, keep reading to learn how the process works and how you can set yourself up to secure the best possible financing for a new or used car.
What Are The Different Types Of Auto Loans Available?
The first thing to understand is that there are several types of auto loans to choose from. Different loans could be more suitable for you, depending on your financial situation. Here’s what you need to know about various types of auto loans.
Secured Auto Loans
A secured auto loan can often provide the best loan terms and lowest interest rates. A secured loan authorizes the lender to repossess the car if you fail to make payments on the loan. You will have to submit a credit check, debt-to-income calculation and credit history check to get a secured auto loan. Secured auto loans are ideal for those who own significant assets.
Unsecured Auto Loans
The process to get an unsecured auto loan is the same as that for secured auto loans. However, an unsecured auto loan often requires a cosigner and brings a shorter loan terms (and therefore higher monthly payments). Some unsecured auto loans also have variable interest rates, which can significantly affect how much you pay each month. On the upside, it’s more difficult for the lender to repossess the car with an unsecured auto loan if you don’t make payments as agreed upon.
Simple Interest Auto Loans
A simple interest auto loan calculates interest based solely on the remaining principal loan balance. Think of a simple interest loan as the opposite of a compound interest loan, where interest for a month’s payment is based on the principal and any accrued interest. Getting a simple interest loan often means lower monthly payments and a lower total payoff sum than a compound interest loan.
If you pay anything more than a monthly payment, the extra money will reduce the principal loan balance and reduce future months’ required payments.
Precomputed Auto Loans
A precomputed loan adds together the principal loan, origination fees and the total interest for the loan. Then, that amount is divided evenly throughout the duration of the loan. With a fixed interest rate and fixed monthly payment amounts, precomputed auto loans are predictable and can be easier to factor into your monthly budget.
How Does Car Financing Work?
To begin the car financing process, be prepared to submit a lot of personal information to lenders. This information may include current and past employment and salary information, personal references, bank statements and more. Lenders will also pull your credit score from one or more credit bureaus.
These tips will help you prepare for financing a car and get the best possible loan terms.
- Check your credit score. The higher your credit score is, the more confidence a lender has that you’ll pay the loan back. Higher credit scores also increase your chances of being approved for a loan and can also translate to lower interest rates. If your credit score is not stellar, don’t panic. There may be several things you can do to improve your credit score.
- Get a preapproved auto loan. Check with your bank or credit union to see what they can do to help you go into the car buying process with a car loan preapproval. With a preapproved auto loan, you can go into the car-shopping process with a clear understanding of how much money you can finance. If you have established a good relationship with your lending institution, they could offer you excellent loan terms.
- Investigate car manufacturer financing options. Carmakers sometimes offer excellent lending programs. You just have to find the one that will work best for you. If you have a certain make of car in mind for your upcoming purchase, talk to your local dealership to see what kinds of manufacturer financing programs are available.
- Determine your down payment. The more you can pay up-front at the time of your auto purchase, the less money you will have to finance. While some lending programs will finance a car with no down payment, this is not the case for all lenders.
Is Financing A Car Bad?
Financing a car could be a good idea if you want to drive a new or gently used car that you don’t have enough cash to pay for in full. Newer cars are less likely to need major repairs than older cars; the hassle and expense of frequent repairs can be a lot to deal with. If you can get a car loan with good terms and a low-interest rate, be sure the monthly payment will fit comfortably into your budget. In addition, making car loan payments on time will also reflect positively on your credit scores.
On the other hand, cars depreciate over time. Cars lose value the instant they’re driven off the lot by their new owners. So the moment you take out a loan for a car, the car is worth less than its loan amount. That can be a hard pill to swallow for some people.
So is financing a car a good or bad idea? It depends on your transportation needs and current financial situation. If you need help deciding whether or how much to finance with a new car, Arizona Central Credit Union’s auto loan experts can help you make an informed choice.
Consider Arizona Central Credit Union To Help Finance Your Next Vehicle Purchase
If you’re in the market for an auto loan, consider Arizona Central Credit Union. Whether or not you’re a current credit union member, we offer competitive auto loans, planning tools and a helpful auto loan team that will help you get behind the wheel of a great new car. We also work with a local network of preferred dealers to help our customers get the best possible interest rates and loan terms.
To get started, call (866) 264-6421 or complete our online contact form today.
